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.
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
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.
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.
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?