hi I'm Jimmy in this video we're looking at AT&T ticker symbol T this video is
part of our dividend aristocrat series where we're analyzing each of the companies
within the dividend aristocrats ETF the goal of this series is to see if we can
find the top dividend aristocrat stocks that have a good chance of paying us a
reliable dividend and ultimately getting us closer to our goal of achieving
financial independence okay so many of us dividend investors know that AT&T is
a fan favorite because they have a solid dividend yield and in theory they're a
great dividend in history so this is dividend this is AT&T's dividend
history going back to 2004 and as we could see the their dividends are the
ones in the blue bars well dividends have been gradually
rising every year since 2004 it's actually before that and earnings per
share well they're the in the orange bars and they've consistently covered
the dividends per share which is exactly what we want from our dividend stocks
okay now let's look quickly at AT&T's business and then we'll try to value
AT&T stock using a discounted cash flow valuation one so we can break break
AT&T's business through the four main segments the largest is a communication
segment now if we wanted we could break their communication segment into smaller
segments within that segment for that we have mobility the Entertainment Group
and their business wild line segment but then when we switch back to their main
segments now we have their second largest segment which is worn or meteor
and I actually think this is where this is one of the issues with AT&T in
general because the further we break into each segment the further we look
into each segment well they have segments within segments within segments
and it can really over complicate the business so to illustrate Warner media
can be broken into Warner Brothers Turner and HBO now here's my issue with
this switching back to the main segments again now my issue is that AT&T s
business is way more complex than it really needs to be so we we look at
their two main segments and then we broke down each of those segments
quickly into sub segments but crazily enough the fun doesn't stop there
they go even further breaking down those segments into more segments and
sometimes a need of an additional segment on top of that to illustrate
this is what their breakdown would have looked like at different levels and to
me I found this tricky to go through and try to identify where there were
potential opportunities or whether the potential threats might lie so the first
thing I'd love to see is for AT&T to clean a lot of this up if they
ultimately went out of their way to simplify the business I think that would
make it much easier to analyze them much easier for investors to get on board and
properly value the stock now I think some of this has happened because
they've made so many acquisitions some good some bad but either way I think
would be much easy to forecast the business if they gradually cleaned all
this up and sort of rebranded things and kept them much more uniform than they
currently are ok moving past that to the most recent earnings announcement so
just a week or so ago AT&T came out the earnings and in that earnings
announcement one of the focal points by management was their need to reduce debt
or at least called their long-term goals one of their long-term goals was to
reduce debt and that's a good thing because this is what their debt looks
like going back the past few years and this is a ton of debt for a company like
AT&T for any company really to have this much debt and this debt is actually
closely tied to what I mentioned a moment ago about cleaning the whole
business up see some of the jumps here are related to some major acquisitions
that AT&T has made for example back here the jump in from 2014 to 2015 that's
back 180 acquired DirecTV and then the jump from 2016 to 2017 well that's what
happened when they acquired Time Warner so one of the goals that AT&T's
management has stated is that they want to pay off the debt from the time warner
acquisition by 2022 I think that was about 40 billion dollars in debt if I'm
not mistaken of debt that they're trying to pay off by 2022 so I think that
that's possible they have enough free cash flow and enough earnings per share
to potentially handle that type of thing and I think that they're heading in the
right direction operationally as they try to improve their operational
efficiency and lower expenses and cutting this debt will be important to
the value of AT&T stock so now I think it makes sense for us to
jump over there or dis kind of free cash flow model so this is the discount of
free cash flow valuation model that I put together for AT&T now I'm not going
to spend too much time walk you through how all this actually works I did a
video on the whole thing on the whole process if you're interested I've got a
link in the description below on the video and I also put together an excel
template I can email that to you if you're interested
there's a link below for both the video and the excel template but basically
here's the gist of it we took analysts estimates as far as
free cash flows concerned and based on their 2019 free cash flow numbers it
seems to me that the analyst estimates are somewhat reasonable they put up
twenty nine billion dollars in 2019 so antal assessments they don't touch that
for the next four years and I think that's very reasonable then we use
required return of eight and a half percent and I've been using eight and a
half percent consistently on all of the companies in our dividend aristocrat
series to try to keep things consistent I'm assuming that's what we're trying
that's our required rate of return so I've consistently stuck with eight and a
half percent no matter what valuation method were using then use the perpetual
growth rate of two and a half percent and that gives us a fair value of the
company have about four hundred and fifty 1 billion dollars so if we divide
that by the shares outstanding we get a fair value for AT&T stock of about sixty
two dollars per share and to me this might seem like a bit on the high side
I'm sure any of us who know or realize that AT&T stock is currently trading at
about thirty-eight dollars per share so clearly 62 is a bit high and obviously
the main reason for this is the massive amount of debt that AT&T has now
technically if we don't include the debt if we don't include an adjustment for
debt then technically what we're doing is we're valuing the entire company so
if the company had no debt well that would be worth about sixty two dollars
per share assuming you believe the inputs well if
it had a modest amount of debt often time you could just stop here if it's a
reasonable amount of debt and I think the cleanest way to determine a
reasonable amount of debt is by looking at how the company trades on average
versus a regent reasonable calculation of fair value
done a few videos on AT&T in the past and each time we do we use a discount of
free cash flow valuation method and it was always a bit high but once we
account for debt in our free cash flow valuation method well we ended up with a
fair value of AT&T stock about $38 per share which is once again right about
where they're trading now so hypothetically if AT&T were to pay off
20 billion dollars of their debt right now well they would have net debt we
would adjust net debts 172 billion found 152 billion and just like that the fair
value of the stock would jump up to 50 $41 per share so this could give us a
good potential up idea of if they were to pay off debt but what would the stock
hypothetically what would it go to then and I believe that management said that
they want to pay off about 40 billion dollars by 2022 so if they did that well
forty billion dollars would be adjusted and the stock would be worth about
forty-four dollars per share so for many of us this may be a great return as far
as dividend investors are going as far as different investors are concerned
because right now they're paying dividend yield of about five and a half
percent plus if we would get capital gains and something we bought it at $38
we're gonna capital gains up to forty four dollars per share well maybe we're
in pretty good shape at that point now I do think it makes
more sense to buy this at a discount to our calculation of fair value the issue
with using the $44 number is that we then have to assume that they're gonna
pay off the debt you have to believe that and then we sort of have to pay as
if they've already done it I think it makes more sense to stick with the $38
per share and then try to buy it at a discount to that let's look wait for a
pullback in the stock now if you're wondering how I go through my entire
research process of you know coming up with a fair value or understanding the
segments that the business operates in where to find this information what
order how do you go about researching a company you know nothing about if we
knew nothing where would we start what's the whole process well I actually do the
video where I break down that process into eight steps where I tell you more
about what information to go through and where to find that information so if
you're interested that could be a good next video for you to watch if you're
curious how to do this on your own there's a link right here and there's a
link in the description below and I want to thank you for sticking with me all
the way to the video thank you I really
appreciate it thanks and I'll see in the next video