My Financial Independence Journey » Stock Analysis » Verizon (VZ) Dividend Stock Analysis
Verizon (VZ) Dividend Stock Analysis
Verizon (VZ) provides wireless and wired communication services to over 120 million customers. VZ’s landline service, which is operated in conjunction with Vodafone (VOD) serves about 21.8 million customers, while Verizon wireless serves about 100 million customers. Verizon also offers broadband internet to around 9 million customers. About 65% of Verizon’s post-paid (read: those of us who signed a contract for cell service) customers have a smart phone.
VZ Basic Company Stats
- Ticker Symbol: VZ
- PE Ratio: 88.9
- Yield: 4.2%
- % above 52 week low: 58.2%
- Beta: 0.18
- Market cap: $138.90 B
- Website: www.verizon.com
VZ vs the S&P500 over 10 years
VZ has generally underperformed the S&P500 over the last 10 years. An investment in VZ would have grown by about 35% compared to approximately 70% that an investment in the S&P500 would have grown.
VZ Cash Flow & Revenue Growth
- 1 year revenue growth: 4.5%
- 3 year revenue growth: 4.3%
- 5 year revenue growth: 4.4%
- 10 year revenue growth: 6.1%
Overall, VZ’s revenue growth has been nicely moving upwards. VZ’s cash flow over the last last decade has not mirrored the increase in total revenue, but does appear to be relatively steady across time, with a noticeable dip in 2006.
VZ Earnings Per Share (EPS) & Dividend Growth
- 1 year EPS growth: -63.5%
- 3 year EPS growth: -41.3%
- 5 year EPS growth: -39.1%
- 10 year EPS growth: -14.5%
Wait… what? No, those aren’t typos. EPS growth has been negative. But cash flow has been strong, dividends have been growing, and revenue has also been increasing. So let’s look at dividends vs cash flow.
Before we move onto cash flow, it would be worthwhile mentioning that the steady decrease in VZ’s EPS has been due to employee benefit costs. Basically, increasing pension and health care costs can be used for EPS write downs. The moral of the story: EPS can be fudged, modified, tinkered with, or otherwise adjusted, so always check out the cash flow.
This shows a strikingly different picture, with dividend payouts nicely covered by free cash flow.
- 1 year dividend growth: 3.1%
- 3 year dividend growth: 2.8%
- 5 year dividend growth: 3.7%
- 10 year dividend growth: 3.1%
VZ’s dividend growth is slow and steady at around 3% or so.
With a starting yield of 4.2% and a growth rate of about 3%, VZ’s yield on cost will grow to well in excess of 5.75% in 10 years. In order to double the dividend, using the rule of 72, it will take about 24 years.
VZ Payout Ratio
As you probably could have guessed based on the above comparison of dividends to earnings, the payout ratio as traditionally calculated (dividend/EPS) is meaningless. And the current chart supports that assumption. So once again, we turn our attention to cash flow. This time, examining a payout ratio constructed from dividends divided by cash flow.
When the payout ratio is compared to cash flow, a much different story emerges. Namely, a low but slowly rising payout ratio, with a one time spike in 2006.
VZ Balance Sheet
The current debt of capitalization is 59% and has remained around that level for the last five years.
VZ Risks
Verizon and AT&T (T) largely dominate the cell phone service market. Sprint and T-mobile continue to nip at their heels, but so far haven’t been that effective at taking away customers. There is some threat from the burgeoning low cost and pre-paid markets, but these companies tend to get lower quality phones and have sketchy service at best. That doesn’t mean that they won’t improve over the next few years, only that they aren’t a major threat at the moment.
Verizon FIOS, the fiber optic broadband service, has to compete with other cable and DSL broadband providers. However, the word “competition” should appear in quotes since there is no true competition in the broadband market, which is much better described as an oligopoly. At best you’ll have 2, maybe 3, choices. Usually just one. Verizon has been aggressively expanding the area served by FIOS, so I would expect this to be a growth area in the future.
VZ Valuation Panel
Graham Number
The Graham number represents one very simple way to value a stock. The Graham number for VZ is $12.14. The stock price is higher than the Graham number, suggesting that VZ may be slightly overvalued valued at the moment.
However, as we saw above, the EPS for VZ was abnormally low, suggesting that the Graham number is likely a meaningless valuation metric for this stock at this time.
Two Stage Dividend Discount Model
Given the slow rate of dividend growth, using the two stage model would not be appropriate.
One Stage (Gordon Growth) Dividend Discount Model
Using a growth rate of 3.0% and a 10% discount rate, the one stage model produces a value of $30.31, suggesting that VZ is overvalued.
Historical Yield Comparison
This figure is built by plotting the highest dividend yield each year (red line) and the lowest dividend yield of each year (blue line). Basically, I took the yearly divided it by the yearly high and low of the stock price to get the two yields. The green line represents the current dividend yield. The closer the green line comes to the red line, the more undervalued the stock is. Since the green line is mostly overlapping the blue at this point, VZ is overvalued.
Note: This valuation method was adapted from JC at www.passive-income-pursuit.com.
Valuation Conclusion
Both of the valuation models that I have faith in point to VZ being overvalued at the moment.
VZ Cash Secured Puts
Given how overvalued VZ appears at the moment, I’m not going to recommend buying it or selling puts against it.
Conclusions
While I like Verizon quite a bit as a company, at the present it is far too overvalued for me to invest in. Given the snails pace of dividend growth, this is a good company to grab when it’s hovering around its 52 week low, rather than the 52 week high.
Disclosure: Nothing to disclose.
Readers: What are your opinions about Verizon?
Written by MFIJ
Filed under: Stock Analysis · Tags: stock analysis, verizon, vz
12 Responses to "Verizon (VZ) Dividend Stock Analysis"
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I’ve been considering buying this one for awhile, but have been waiting for a nice dip to dive in. Hopefully some time this year there will be some profit-taking and I can sneak in there…
The thing about VZ is that the dividend growth is so slow that you’ll probably want to wait for it to take a real big dip before investing. Otherwise it’s not that great of a deal.
Of the three major telecom stocks, VZ, VOD, and T, which would you recommend right now? All three have been sinking steadily for the past few weeks.
Probably VZ or T. But I’m not sure. T will be the next stock I do a write up on, so look for it the Monday after Labor Day.
I need to look again at T and VOD. I like the yields and my YOC’s are nice but who knows where the growth is going to come from, especially for T. VOD at least has international exposure plus another currency so that helps to diversify a bit, but I’m not sure what to make of management hinting about freezing the dividend. Like Scoonie above, I’d be interested to hear your take on T and VOD as well.
VZ definitely seems a bit overvalued at current prices and given the slow growth I wouldn’t be buying here. 4% yield with 3% growth just doesn’t do it for me, plus you’re only keeping pace with inflation on average. I think for utilities and quasi-utilities like the telco’s, cash flow is usually a better metric than eps because of the large depreciation figures for the cost of their infrastructure. And just comparing the two above shows a big difference in the health of the dividend.
Glad to see you incorporating the hi/low yield. That’s one of my favorite charts because you can see the trend in the yields and the relative location along those trends. VZ seems to be in a relatively defined yield channel and now would not be the time to purchase. It’s just one more technique and really lends to a visual representation.
I’d agree that VZ is overvalued at the moment. T probably is too, but I won’t be running an analysis of it for a couple of weeks.
I rather enjoyed the hi/low yield and I’ll be adding it in from now on. You’ve got a few more valuation systems that I really like and am trying to find the time to figure out. I’m trying to revamp how I do stock analyses to add in some more info and make them more useful. So I think they’ll probably go through a few more changes in the upcoming months.
I am holding off on any of the current major telecom players. Google seems poised to take a chunk out of the big three, and is gaining great public favor with programs like Google Fiber.
Google Fiber sounds amazing. But, I personally think it’s going to wind up being a one hit wonder. Google makes tons of great products, but they don’t seem to focus their efforts on expanding that many of them. If Fiber doesn’t turn out to be a cash cow, I wouldn’t expect to see it spreading much farther than Kansas City.
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VZ is pretty overvalued at this point. Its reasonable yield is unfortunately outweighed by very modest dividend growth. You’re almost better off going slightly lower in yield like MCD which has far better dividend growth. Within a few years, a higher growing dividend stock that starts off with slightly lower yield will end up with a higher dividend.
Verizon Wireless growth will likely hit some headwinds in the next few years as defections from Sprint slowdown and the feature phone to smart phone growth slows. The question is do people really adopt connected devices in a big way and does that drive data…..it remains to be seen how this plays out.
Like you suggest, I’d be looking to very heavy falls in price from any of the Dividend Sloths (which I consider Verizon to be) before buying. If the initial yield was 7%+ that would get me interested…
VZ (along with T and a lot of the utility companies) seems like the kind of company where the dividend growth is so slow that it’s best bought when it hits a valuation nadir. There’s just plenty of other stocks out there with better dividend growth that will be paying out a much higher yield on cost in 5-10 years.
VS announced its quarterly dividend increase of 2.9% to $0.53 per share. Not very exciting.