Author: James Hofmann
Model: Dividend Growth
Disclosure: Long T
Over the weekend AT&T (NYSE: T) the second largest wireless carrier in the US announced plans to buy T-Mobile the fourth largest carrier in the US for $39 billion. The combined company will be the largest provider in the US surpassing Verizon by nearly a third. In my Dividend Growth model I have a conviction sized position of nearly 7.5% in AT&T. Their steady dividend, stable cash flows, and cheap valuation creates what I believe to be one of the best values in the market today.
If this merger passes regulatory approval AT&T will have two new critical competitive advantages. The first competitive advantage will come from being the largest carrier in the US. It includes both cost savings and the pricing power they will gain from their dominant position. The second advantage however is a much more significant factor. AT&T and T-Mobile’s networks should integrate nearly flawlessly and will complement each other. T-Mobile’s network will help relieve some of the stresses AT&T’s network is struggling with in congested areas. In return AT&T’s network will boost service in rural areas for T-Mobile’s assets. They will also benefit from combining spectrums.
On a valuation basis AT&T is still a better deal even after its 1.15% up move today March 21st, 2011. Off of this year’s forecasted earnings AT&T is trading at a price to earnings multiple of 12 while its competitor Verizon (VZ) is trading at a premium of 16.4. AT&T also sports a more conservative dividend with a higher yield at 6% and an estimated payout ratio off of this years earnings at 72% compared to Verizon’s 5.3% yield and 87% payout. From a dividend based perspective AT&T is the better position to own and AT&T’s new competitive edge clearly makes them the winner in this now 3-man race.
| Dividend | T 2011 | T 2012 | VZ 2011 | VZ 2012 |
| Forecasted Earnings* | 2.38 | 2.56 | 2.23 | 2.63 |
| Forecasted Payout Ratio* | 72% | 72% | 87% | 87% |
| Estimated Dividend | $1.72 | $1.84 | $1.95 | $2.28 |
| Current Price | $28.40 | $28.40 | $36.70 | $36.70 |
| Forecasted Yield | 6% | 6.4% | 5.3% | 6.2% |
* Earnings estimates are from the mean average of analysts covering the stock, sourced from Yahoo Finance as of 3/21/11 (http://finance.yahoo.com). Payout ratios are calculated from this year’s estimated earnings with regard to estimated whole year dividend payments.
