Valuation:
Using a discounted free cash flow model, Verizon’s current stock price is reasonable with some upside potential depending on growth. For example, we can back into Verizon’s current market price (~$52 per share) if we assume an average long-term growth rate of 1.9%, which is not unreasonable considering the 29 analysts surveyed on Yahoo finance expect the 5-year growth rate to be 1.68%. Additionally, given the company’s low beta and long-term stability, and the attractiveness of its big dividend to income-focused investors, we believe Verizon’s price is unlikely to decline dramatically.
Also worth considering, Verizon’s forward price-to-earnings ratio is not unreasonable versus it recent history as shown in the following chart. For example, it’s certainly cheaper than it was this time last year when investors were almost insatiably bidding up the price of “safe haven” dividend stocks.
Risks:
Verizon Communications Inc. (NYSE:VZ) faces a variety of risks worth considering. For starters, the company is stuck in the challenging position of trying to be both a growth company and a value company. It’s a value company in the sense that it’s a mature and extremely cost conscious, and it pays a big dividend. However, it’s a growth company in the sense that it is forced to search for new growth opportunities (such as digital marketing) as its traditional communications industry continues to evolve. Balancing these two aspects of the business creates challenges (for example, Verizon is not able to pursue growth as aggressively as other companies that do not spend large amounts of cash on dividends), however Verizon has been able to navigate the space and find a successful niche thus far, and provide the stable dividend growth that its investors want.
Another risk for shareholders is that Verizon’s volatility and dividend policies may change over time. For example, as Verizon pursues more growth opportunities, its volatility may increase. Additionally, Verizon may have less cash available to maintain the current pace of dividend increases as it is forced to spend on new opportunities. For example, we’ve already seen how Verizon’s dividend payout ratio is being stretched (see previous chart above).
Other risks include the intense competition in the communications and digital marketing industries, the constant threat of new regulations, and the risks of meeting its long-term legacy pension liabilities given the persistent possibility of market volatility and declines.
Conclusion:
Despite the risks, we consider Verizon an attractive investment for income-focused investors. In fact, we’ve ranked Verizon #9 on our list of top 10 Big Dividends Worth Considering because of its valuation and because we believe it will be successful in generating the cash flows it needs to support the big, growing, dividend payments. Ideally, we’d like to see Verizon add to its cash flows via strategic initiatives (such as digital marketing revenues through a successful Yahoo integration). However, the company also has the ability to keep raising cash by selling off assets, if need be (i.e. Verizon does have the best wireless network in the US). Overall, if you are a long-term, income-focused investor, we believe Verizon is worth considering for an allocation within your diversified investment portfolio.
Note: This article was written by Blue Harbinger. At Blue Harbinger, our mission is to help you identify exceptional investment opportunities while avoiding the high costs and conflicts of interest that are prevalent throughout the industry. We offer additional free reports and a premium subscription service at BlueHarbinger.com. If you are ever in the Naperville, IL, USA area, our founder (Mark D. Hines) is happy to meet you at a local coffeehouse to talk about investments. Please feel free to get in touch.
