In this article, let's take a look at Verizon Communications Inc. (VZ, Financial), a $213.3 billion market cap company that is a provider of communications, information and entertainment products and services to consumers, businesses and governmental agencies with a presence in over 150 countries around the world.
A leader
Verizon Wireless is a leader in the industry, being the biggest wireless carrier in the U.S. with more than 100 million retail customers and a tremendous coverage of more than 95% of the U.S. population and is still increasing new subscribers for example with the evolution of 4G Long Term Evolution (LTE) network and smartphone sales. The firm continues investing in its networks and focusing on making the brand penetrate the market with an effective message.
Only AT&T (T, Financial) could reach Verizon´s scale, but its competitive advantages, like a better position that includes two largely nationwide blocks and a superior network reputation, makes me think that Verizon´s position is not at risk. Continuing with the analysis of competitors, we can introduce T-Mobile US (TMUS, Financial) and Sprint (S, Financial). The first company has become a strong competitor, and the second is focusing on competing more aggressively.
Dividend yield
Since 1984, Verizon has a dividend policy showing its commitment to returning cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. The current dividend yield is 4.2% which is above the industry average as well as S&P 500 average dividend yields.
Revenues, margins and profitability
Looking at profitability, revenues grew by 4.31% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.89 vs $0.78). During the past fiscal year, the company increased its bottom line. It earned $4.00 versus $0.31 in the previous year. For the next year, Wall Street is expecting a contraction of 13.3% in earnings ($3.47 versus $4.00).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| VZ | Verizon | 71.7 |
| T | AT&T | 18.92 |
| S | Spint | -7.58 |
| TMUS | T-Mobile | 0.9 |
| Â | Industry Median | 13.31 |
The company has a current ROE of 71.7% which is higher than the one exhibited by Time Warner Inc. (TWX, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 10.7x, trading at a discount compared to an average of 22.6x for the industry. To use another metric, its price-to-book ratio of 12.9x indicates a premium versus the industry average of 2.99x while the price-to-sales ratio of 1.5x is below the industry average of 1.66x.
As we can see in the next chart, the stock price has an upward trend in the five-year period.
Final comment
As outlined in the article, the firm's scale makes the company a market leader, and we do not expect this to change in the near term. Further, it plans to develop new services to continue growing. Moreover, the PE relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.
Hedge fund gurus like Tweedy Browne (Trades, Portfolio), Bernard Horn (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), David Dreman (Trades, Portfolio), Murray Stahl (Trades, Portfolio), Ruane Cunniff and Scott Black (Trades, Portfolio) added this stock to their portfolios in the third quarter of 2014, as well as Pioneer Investments (Trades, Portfolio) and Manning & Napier Advisors, Inc.
Disclosure: Omar Venerio holds no position in any stocks mentioned
