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At&T Risk Essay

342 words - 2 pages

Required Rate of Return (CAPM) and Dividends: Based upon the previous three years’ dividend payments, AT&T appears to have a target payout ratio of 70%-80% of earnings. As earnings are cyclically depressed due to the economic downturn, the payout ratio is currently at the upper end of the payout range. With dividends projected to grow at 5% per year, the payout ratio will decline from 83% to 71% in five years and 69% at the terminal value, at which point dividends will grow at 5% in ...view middle of the document...

Thus the expected return on the company’s shares is approximately 11%. We have also estimated an 11% required rate of return on the company’s shares using the Capital Asset Pricing Model (CAPM). A risk-free rate of approximately 4% can be extrapolated from the yields for 10-year and 30-year Treasury securities (approximately 3.5% and 4.4% respectively) for long-lived assets such as AT&T’s network. Based on empirical observation, a 7% historical market risk premium has been observed in the stock market. Finally, we have estimated the beta of AT&T’s equity to be 1.0, which we feel is more indicative of the riskiness of the company’s assets than the observed beta of 0.85. Specifically, the company has increasingly become reliant upon growth in newer, more-risky segments such as wireless, data, and fiber optic (U-Verse TV) and less reliant upon the declining wireline segment. Sprint Nextel, with a beta of 1.15, is a proxy for a firm that is involved almost exclusively in wireless. The segments now driving AT&T’s growth more resemble a cyclical technology company than a stodgy, countercyclical telecommunications utility like the old Ma Bell. It is in these segments that most of the
company’s capital expenditures will be directed; we believe that the riskiness of AT&T’s assets going forward is equal to the average risk of the market portfolio.

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