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Verizon Communications Inc. (VZ) Dividend Stock Analysis

May 03, 2013 | About:

Linked here is a detailed quantitative analysis of Verizon Communications Inc. (NYSE:VZ). Below are some highlights from the above linked analysis:

Company Description: Verizon Communications Inc. is the largest U.S. wireless carrier, Verizon also offers wireline and broadband services primarily in the northeastern U.S.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price

2. 20-Year DCF Price

3. Avg. P/E Price

4. Graham Number

Verizon is trading at a premium to all four valuations above. Since VZ's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 130.1% premium to its calculated fair value of $23.31. VZ did not earn any Stars in this section.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout

2. Debt To Total Capital

3. Key Metrics

4. Dividend Growth Rate

5. Years of Div. Growth

6. Rolling 4-yr Div. > 15%

Verizon earned one Star in this section for 1.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The company has paid a cash dividend to shareholders every year since 1984 and has increased its dividend payments for 9 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.

2. Years to > MMA

The NPV MMA Diff. of the $582 is below the $2,600 target I look for in a stock that has increased dividends as long as VZ has. The stock's current yield of 3.84% exceeds the 2.71% estimated 20-year average MMA rate.

Memberships and Peers: VZ is a member of the S&P 500. The company’s peer group includes: AT&T Inc. (NYSE:T) with a 4.9% yield, CenturyLink, Inc. (NYSE:CTL) with a 5.8% yield and Sprint Nextel Corp. (NYSE:S) with a 0.0%.

Conclusion: VZ did not earn any Stars in the Fair Value section, earned one Star in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of one Star. This quantitatively ranks VZ as a 1-Star Very Weak stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $28.82 before VZ's NPV MMA Differential increased to the $2,600 minimum that I look for in a stock with 9 years of consecutive dividend increases. At that price the stock would yield 7.2%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,600 NPV MMA Differential, the calculated rate is 8.4%. This dividend growth rate is higher than the 2.2% used in this analysis, thus providing no margin of safety. VZ has a risk rating of 2.25 which classifies it as a Medium risk stock.

As the Communication Services sector moves more toward wireless products, VZ is well-positioned to maintain its position as the market leader. The company continues to grow its market share despite premium pricing compared to its major rivals. 2013 should bring benefits from new wireless data plans and FiOS success, in addition to short-term impacts from new smartphone launches. Risks include Verizon Communications Inc possible $100 billion bid to take full control of Verizon Wireless from its partner Vodafone Group.

The company enjoys strong cash flow generation, a low debt position, a perception of network quality and pricing power over its suppliers. VZ's low dividend growth rate of 2.2%, short history of consecutive dividend increases and valuation, keep me from adding the stock to my Dividend Growth Portfolio. However, I do hold the stock in my high-yield portfolio.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I was long in VZ (5.6% of my High Yield Portfolio) and long in T in my Dividend Growth Portfolio. See a list of all my dividend growth holdings here.

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Rating: 4.6/5 (5 votes)


Batbeer2 premium member - 4 years ago
>> Verizon Communications Inc. is the largest U.S. wireless carrier.

That's not true. Cellco partnership is the largest wireless carrier in the U.S.

Verizon communications Inc. is the highly leveraged telephone company formerly known as Bell Atlantic. Whereas Cellco is a great business, Verizon communications is a disaster.

However, Verizon communications, through its subsidiaries, happens to own 55% of Cellco.

Assuming Cellco would trade in the market for $200 billion, each share of VZ gets you:

$40 worth of Cellco ($200B/2.8B shares x 0.55) plus

$17 worth of debt ($50B/2.8B shares) plus

roughly $2 of annual losses for each of the last five years.

To get to $2 of annual losses per share, I back out 55% of Cellco's roughly $15B of annual income from VZ's reported income of $2.5B and divide the result by 2.8B shares.

As you can see, the losses at Verizon communications have been masked by the income from their 55% stake in Cellco. At the current price of $52, you have to assume Cellco is worth $400 billion to get a decent margin of safety on VZ.

Since Verizon and Vodafone have been unable to agree on a merger, I believe there's a fair chance VZ spins out its 55% stake and Cellco becomes publicly traded as a separate entity. They'll probably saddle Cellco with at least $50B worth of debt and return a mountain of cash to the former parents first. In any case, VZ lacks the cash to buy out VOD.

Should VZ shares drop down below $45, pressure will probably mount to breakup that company.

Just some thoughts. Please correct me if I'm missing something.

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