# AT&T Inc. (NYSE:T)

## Present Value of Free Cash Flow to Equity (FCFE)

Intermediate level

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company’s asset base.

### Intrinsic Stock Value (Valuation Summary)

AT&T Inc., free cash flow to equity (FCFE) forecast

US\$ in millions, except per share data

Year Value FCFEt or Terminal value (TVt) Calculation Present value at 8.19%
01 FCFE0 15,312
1 FCFE1 15,702 = 15,312 × (1 + 2.54%) 14,513
2 FCFE2 16,029 = 15,702 × (1 + 2.09%) 13,694
3 FCFE3 16,290 = 16,029 × (1 + 1.63%) 12,863
4 FCFE4 16,481 = 16,290 × (1 + 1.17%) 12,028
5 FCFE5 16,598 = 16,481 × (1 + 0.71%) 11,197
5 Terminal value (TV5) 223,467 = 16,598 × (1 + 0.71%) ÷ (8.19%0.71%) 150,749
Intrinsic value of AT&T Inc.’s common stock 215,044

Intrinsic value of AT&T Inc.’s common stock (per share) \$30.18
Current share price \$28.93

Based on: 10-K (filing date: 2020-02-20).

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 1.66% Expected rate of return on market portfolio2 E(RM) 12.12% Systematic risk of AT&T Inc.’s common stock βT 0.62 Required rate of return on AT&T Inc.’s common stock3 rT 8.19%

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).

3 rT = RF + βT [E(RM) – RF]
= 1.66% + 0.62 [12.12%1.66%]
= 8.19%

### FCFE Growth Rate (g)

#### FCFE growth rate (g) implied by PRAT model

AT&T Inc., PRAT model

Average Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Selected Financial Data (US\$ in millions)
Common stock dividends 15,028  14,117  12,157  11,913  10,755
Preferred stock dividends —  —  —  —
Net income attributable to AT&T 13,903  19,370  29,450  12,976  13,345
Operating revenues 181,193  170,756  160,546  163,786  146,801
Total assets 551,669  531,864  444,097  403,821  402,672
Stockholders’ equity attributable to AT&T 184,221  184,089  140,861  123,135  122,671
Financial Ratios
Retention rate1 -0.08 0.27 0.59 0.08 0.19
Profit margin2 7.67% 11.34% 18.34% 7.92% 9.09%
Asset turnover3 0.33 0.32 0.36 0.41 0.36
Financial leverage4 2.99 2.89 3.15 3.28 3.28
Averages
Retention rate 0.21
Profit margin 10.87%
Asset turnover 0.36
Financial leverage 3.12

FCFE growth rate (g)5 2.54%

Based on: 10-K (filing date: 2020-02-20), 10-K (filing date: 2019-02-20), 10-K (filing date: 2018-02-20), 10-K (filing date: 2017-02-17), 10-K (filing date: 2016-02-18).

2019 Calculations

1 Retention rate = (Net income attributable to AT&T – Common stock dividends – Preferred stock dividends) ÷ (Net income attributable to AT&T – Preferred stock dividends)
= (13,90315,0288) ÷ (13,9038)
= -0.08

2 Profit margin = 100 × (Net income attributable to AT&T – Preferred stock dividends) ÷ Operating revenues
= 100 × (13,9038) ÷ 181,193
= 7.67%

3 Asset turnover = Operating revenues ÷ Total assets
= 181,193 ÷ 551,669
= 0.33

4 Financial leverage = Total assets ÷ Stockholders’ equity attributable to AT&T
= 551,669 ÷ 184,221
= 2.99

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.21 × 10.87% × 0.36 × 3.12
= 2.54%

#### FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (206,155 × 8.19%15,312) ÷ (206,155 + 15,312)
= 0.71%

where:
Equity market value0 = current market value of AT&T Inc.’s common stock (US\$ in millions)
FCFE0 = the last year AT&T Inc.’s free cash flow to equity (US\$ in millions)
r = required rate of return on AT&T Inc.’s common stock

#### FCFE growth rate (g) forecast

AT&T Inc., H-model

Year Value gt
1 g1 2.54%
2 g2 2.09%
3 g3 1.63%
4 g4 1.17%
5 and thereafter g5 0.71%

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

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 2.54% + (0.71%2.54%) × (2 – 1) ÷ (5 – 1)
= 2.09%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 2.54% + (0.71%2.54%) × (3 – 1) ÷ (5 – 1)
= 1.63%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 2.54% + (0.71%2.54%) × (4 – 1) ÷ (5 – 1)
= 1.17%