In the dividend report card series, we analyze financial metrics to begin answering the following questions about a company's dividend:

  1. Over time, has this company steadily increased its payouts?
  2. How sustainable is the dividend?
  3. Does the company have room to further increase the dividend?

For a full explanation of each category, click here for a tutorial.

Today's pupil is AT&T (NYSE: T), which posts a 6.1% dividend yield.

Dividend history

Metric

5-Year Annualized Growth Rate

Dividend per share

5.4%

Diluted earnings per share

25.2%

Source: Capital IQ, a division of Standard & Poor's.

AT&T's dividend per share growth has been rather anaemic relative to EPS growth, but that's largely due to the fact that AT&T was paying out nearly 90% of its earnings in 2005 and probably got too far ahead of itself. AT&T has raised its dividend for 27 consecutive years.

Past returns don't guarantee future results, however, so dividend history is only 10% of the final grade. That said, for this category, AT&T scores a 3 of 5.

Sustainability

 Metric

Trailing 12 Months

Final Grade
Weighting

Report Card Score
(out of 5)

Interest coverage

7.3 times

10%

5

EPS payout ratio

45.1%

10%

5

FCFE payout ratio

51.0%

30%

4

Source: Capital IQ, as of Jan. 23.

Despite having $62.5 billion in long-term debt, AT&T more than covers its interest expenses with operating profits. The stated earnings payout ratio may not be as sterling as it appears, however, because of some extraordinary items over the past 12 months that boosted earnings. In recent years, the EPS payout has been closer to 70%, and I would expect that level to resume in coming years. Still, the current dividend looks sustainable.

Growth

Metric 

Trailing 12 Months

Final Grade
Weighting

Report Card Score
(out of 5)

EPS payout ratio

45.1%

10%

4

FCFE payout ratio

51.0%

20%

3

Sustainable growth rate

10.9%

10%

5

Again, given the augmented earnings in the past 12 months, these numbers probably look a little better than what can be achieved in the longer term. From 2007 to 2009, the sustainable growth rate was 2.8% to 3.2%, which is probably closer to the truth.

Outsized dividend growth potential, however, probably isn't why you'd buy AT&T shares in the first place. If it can maintain its current payout and grow it at a rate comparable to or above inflation, that is a reasonable deal.

Competitors
An "ungraded" section of the dividend report card is to see how a stock's current yield stacks up against direct competitors'. If it's too high relative to competitors' yields, the board could be tempted to slow the growth rate, or vice versa, to bring it more in line with the industry average.

Company

Dividend Yield

Median Analyst Est. Long-Term EPS Growth

Verizon (NYSE: VZ)

5.6%

4.0%

Vodafone (NYSE: VOD)

4.6%

6.5%

Qwest Communications (NYSE: Q)

4.6%

5.9%

With its current yield at 6.1%, AT&T's dividend yield is in the upper range of its peer group, yet analysts expect long-term EPS growth to be 6.5%. Relative to its competitors and based on those figures, AT&T may deserve a closer look.

Pencils down!
With all the numbers in, here's how AT&T's dividend scored:

Weighting

Category

Final Grade

10%

History

3

 

Sustainability

 

10%

Interest Coverage

5

10%

EPS Payout Ratio

5

30%

FCFE Payout Ratio

4

 

Growth

 

10%

EPS Payout Ratio

4

20%

FCFE Payout Ratio

3

10%

Sustainable growth

5

100%

Total Score (Out of 5)

4.0

 

Final Grade

B

Even if we assumed a 70% earnings payout ratio over the past 12 months, AT&T's dividend would have still received a B- (3.5 of 5). That's quite good given that its yield is more than three times the S&P 500 average of 1.77%. And that's reason enough for further research.

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Todd Wenning is the advisor of Motley Fool UK Dividend Edge. He does not own shares of any company mentioned. Vodafone is a Motley Fool Inside Value recommendation. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.