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?

The Dividend Report Card wasn't designed as a buy or sell signal but rather as a tool to gauge the health of a company's dividend. For a full explanation of each category, click here for a tutorial.

Today's pupil is AT&T (NYSE: T) , which posts a 5.5% dividend yield. When we looked at AT&T last quarter, it scored a very solid "B" (4 out of 5). Let's see how it did this time around.

Dividend history

Metric

5-Year Annualized Growth Rate

Dividend per share 5.4%

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

AT&T has raised its dividend for 27 consecutive years, but the past few years have felt a little more like token increases than serious confidence-signalling boosts. In 2009, for example, the payout inched up 2.5% from $0.40 to $0.41 per quarter, followed by another 2.5% increase in 2010, and a 2.4% increase this year.

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 6.3 times 10% 4
EPS payout ratio 47.9% 10% 5
FCFE payout ratio 60.2% 30% 4

Source: Capital IQ, as of May 19.

AT&T's interest coverage declined slightly since the last time we looked at it, but it seems to have no problem paying the bills. Morningstar gives the company a very decent credit rating of "A-" and low rates should keep interest costs at bay for the near-term.

The dividend is well covered by both earnings and free cash flow, so the current payout appears sustainable.

Growth

Metric 

Trailing 12 Months

Final Grade
Weighting

Report Card Score
(out of 5)

EPS payout ratio 47.9% 10% 4
FCFE payout ratio 60.2% 20% 3
Sustainable growth rate 9.8% 10% 4

Consensus analyst estimates for long-term earnings growth is currently 5.5%, which is also a bit lower than the 6.5% consensus we saw in January.

It's likely that dividend growth will remain in the 2-5% annualized rate going forward as the company seems to have other priorities for free cash at the moment. In December, for instance, the company announced it could buyback as many as 300 million shares -- its first buyback announcement in three years. What's more, it will need to spend more on 4G wireless spectrum to keep pace with other major national carriers.

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) 4.8% 5%
Vodafone (NYSE: VOD) 4.8% 3.7%
Telefonica SA (NYSE: TEF) 10.4% 2.7%

Pared with its 5.5% estimated earnings growth and its current yield at 5.5%, AT&T's dividend yield looks comparatively good relative to this peer group.

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

4

10%

EPS Payout Ratio

5

30%

FCFE Payout Ratio

4

  Growth  

10%

EPS Payout Ratio

4

20%

FCFE Payout Ratio

3

10%

Sustainable growth

4

100%

Total Score (Out of 5)

3.8

  Final Grade

B

Though AT&T lost two-tenths of a point since the previous review, it retains its "B" grade. Given that its yield remains about three times the S&P 500 average of 1.8, it remains a good research candidate.

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Todd Wenning is the advisor of Motley Fool UK Dividend Edge. You can follow him on Twitter. He does not own shares of any company mentioned. AT&T and Vodafone are Motley Fool Inside Value recommendations. 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 owns shares of Telefonica S.A. and has a disclosure policy.