AT&T Inc. (T) | Dividend Discount Model (DDM)

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Dividends are the cleanest and most straightforward measure of cash flow because these are clearly cash flows that go directly to the investor.

Intrinsic Stock Value (Valuation Summery)

AT&T Inc., dividends per share (DPS) forecast

USD \$

Year Value DPSt or Terminal value (TVt) Calculation Present value at 7.46%
0 DPS01 1.76
1 DPS1 1.72 = 1.76 × (1 + -2.29%) 1.60
2 DPS2 1.70 = 1.72 × (1 + -1.06%) 1.47
3 DPS3 1.70 = 1.70 × (1 + 0.18%) 1.37
4 DPS4 1.73 = 1.70 × (1 + 1.41%) 1.30
5 DPS5 1.77 = 1.73 × (1 + 2.64%) 1.24
5 Terminal value (TV5) 37.74 = 1.77 × (1 + 2.64%) ÷ (7.46% – 2.64%) 26.33
Intrinsic value of 's common stock (per share) \$33.31
Current share price \$37.44

1 DPS0 = Sum of last year dividends per share of 's common stock. See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 2.77% Expected rate of return on market portfolio2 E(RM) 13.09% Systematic risk (β) of 's common stock βT 0.45 Required rate of return on 's common stock3 rT 7.46%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

Calculations

3 rT = RF + βT [E(RM) – RF]
= 2.77% + 0.45 [13.09% – 2.77%]
= 7.46%

Dividend Growth Rate (g)

Dividend growth rate (g) implied by PRAT model

AT&T Inc., PRAT model

Average Dec 31, 2012 Dec 31, 2011 Dec 31, 2010 Dec 31, 2009 Dec 31, 2008
Selected Financial Data (USD \$ in millions)
Dividends to stockholders   10,196  10,244  9,985  9,733  9,506
Net income attributable to AT&T   7,264  3,944  19,864  12,535  12,867
Operating revenues   127,434  126,723  124,280  123,018  124,028
Total assets   272,315  270,344  268,488  268,752  265,245
Stockholders' equity attributable to parent   92,362  105,534  111,647  101,900  96,347
Ratios
Retention rate1   -0.40 -1.60 0.50 0.22 0.26
Profit margin2   5.70% 3.11% 15.98% 10.19% 10.37%
Asset turnover3   0.47 0.47 0.46 0.46 0.47
Financial leverage4   2.95 2.56 2.40 2.64 2.75
Averages
Retention rate -0.20
Profit margin 9.07%
Asset turnover 0.46
Financial leverage 2.66

Dividend growth rate (g)5 -2.29%

2012 Calculations

1 Retention rate = (Net income attributable to AT&T – Dividends to stockholders) ÷ Net income attributable to AT&T
= (7,264 – 10,196) ÷ 7,264 = -0.40

2 Profit margin = 100 × Net income attributable to AT&T ÷ Operating revenues
= 100 × 7,264 ÷ 127,434 = 5.70%

3 Asset turnover = Operating revenues ÷ Total assets
= 127,434 ÷ 272,315 = 0.47

4 Financial leverage = Total assets ÷ Stockholders' equity attributable to parent
= 272,315 ÷ 92,362 = 2.95

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= -0.20 × 9.07% × 0.46 × 2.66 = -2.29%

Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$37.44 × 7.46% – \$1.76) ÷ (\$37.44 + \$1.76) = 2.64%

where:
P0 = current price of share of 's common stock
D0 = last year dividends per share of 's common stock
r = required rate of return on 's common stock

Dividend growth rate (g) forecast

AT&T Inc., H-model

Year Value gt
1 g1 -2.29%
2 g2 -1.06%
3 g3 0.18%
4 g4 1.41%
5 and thereafter g5 2.64%

where:
g1 is implied by PRAT model
g5 is implied by Gordon growth model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= -2.29% + (2.64% – -2.29%) × (2 – 1) ÷ (5 – 1) = -1.06%

g2 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= -2.29% + (2.64% – -2.29%) × (3 – 1) ÷ (5 – 1) = 0.18%

g2 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= -2.29% + (2.64% – -2.29%) × (4 – 1) ÷ (5 – 1) = 1.41%