Executive Summary
This task involves analyzing the dividend growth and implied rate of return for AT&T and Verizon. First, the most recent quarterly dividend for AT&T will be identified on the “Dividends” page of morningstar.com, which is $0.52 per share. Based on this, the total expected dividend for the next year is $2.08. A dividend growth rate of 2.04% over the past five years will be calculated. Using the Constant Dividend Growth formula, we will estimate the implied rate of return for AT&T, assuming a 2.18% annual growth rate. The same analysis will be applied to Verizon. The current stock prices for both companies will be used to determine their required rates of return.
Implied Rate of Return for AT&T Using the Constant Dividend Growth Formula
The Constant Dividend Growth Model (CDGM) proposes a technique for estimating the implied bargain charge for shares. This is based on expected dividends, boom prices, and the cutting-edge percentage charge. For AT&T, the calculation should encompass an anticipated dividend of $2.08. The U.S. Has a dividend boom rate of 2.18% and a modern proportion charge of 16.50 USD (Morningstar, n.d.). Here is the system to calculate the predicted bargain price for AT&T using the constant dividend growth model:
Implied Discount Rate = Expected Dividend Current Stock Price + Dividend Growth Rate
This formula shows several components; for example, the term “Expected Dividend” is based on the expected annual payment of dividends. The term “Dividend Growth Rate” shows the projected dividend growth rate. To determine a specific result for the current situation:
Implied Discount Rate = 2.08×16.50+0.0218 = 0.1477
To express it as a percentage, it can be multiplied by 100:
Implied Discount Rate = 14.77%
Consequently, given AT&T’s current share price of $16.50, the estimated discount rate is roughly 14.77%, meaning investors expect this return percentage. Given the expected dividend and growth rate, this may justify the current share price.
Implied Rate of Return for Verizon Using the Constant Dividend Growth Formula
Similar calculations may be made for Verizon so buyers can gain price expertise. Next, you need to evaluate the anticipated bargain rate of the two shares. Investors can only accept a lower return charge for AT&T if it is decreased than Verizon’s. This may be done so they will not remember it as less unstable. The idea is steady with the precept that higher-chance investments must provide higher returns. So the components to calculate the cut price rate for Verizon is:
Implied Discount Rate = 2.08×38.15+0.0218 = 0.0763
To express it as a percentage, it can be multiplied by 100:
Implied Discount Rate = 7.63%
As a result, Verizon’s current share price is $38.15, and the implied discount rate is approximately 7.63%.
Comparison of Implied Discount Rates for AT&T and Verizon
Verizon’s lower implied discount rate of 7.63% implies that investors are willing to accept a lower return, viewing it as a less risky investment. In contrast, AT&T’s higher rate of 14.77% indicates that it is perceived as more unstable, leading investors to expect a higher return. This difference in rates suggests that AT&T, with its higher implied discount, might be considered cheaper, reflecting a higher risk or lower growth expectation. Meanwhile, Verizon’s lower rate points to a higher relative price, indicating a more stable outlook based on anticipated dividends and growth.