Verizon: 'Best Of Breed' 4.5% Yield Pick

Feb.13.14 | About: Verizon Communications (VZ)

Executive summary:

  • The market in 2014 is a very different beast than the go-go days of 2013.
  • The increasing volatility calls for a different strategy.
  • High yield stocks & sectors have outperformed the market so far in the New Year, and are likely to continue to do so.
  • Verizon is a good selection for income investors as this 'Best of Breed' pick offers safety, yield and reasonable valuations.


"Two roads diverged in a wood, and I took the one less traveled by, And that has made all the difference." - Robert Frost

The market opened choppy in early trading on Thursday. This continues a trend of increasing volatility in the New Year. ~90% of the trading sessions so far in 2014 have shown at least 100 point intraday swings in the Dow. This contrasts substantially with 2013's 30% rally in the markets that saw equities consistently rise throughout the year barely providing investors any pull backs to 'buy the dips'.

Another trend that is quite apparent is that high yield value stocks are significantly outperforming high multiple growth stocks like Amazon (NASDAQ:AMZN) that were core drivers of the huge rise in the markets last year.

With the market facing the withdrawal of liquidity by the Federal Reserve, continued turmoil in emerging markets and the slow revenue growth most companies are experiencing right now; I believe this outperformance can continue for a while. High yield, low beta stocks at reasonable valuations seem to be good candidates to pick up during the more frequent sell-offs in the overall market.

Earlier in the week we took a look at AT&T (NYSE:T) which looked attractive given its almost six percent yield and a ~15% decline in its stock since May. Today let's take a look at the 'best of breed' player in domestic telecom, Verizon (NYSE:VZ).

Verizon looks attractive here for long term investors looking for slow but consistent growth with a solid payout. The shares yield 4.5% at these levels and the company has consistently & incrementally raised its payout on an annual basis for a decade.

Verizon pays a lower dividend yield than AT&T but it is also growing revenues at a 3% to 4% annual rate against AT&T's 1% to 2% yearly pace. Verizon's revenue growth is right in line with the overall expectations for the S&P 500 in 2014. Earnings are posting ~10% year-over-year gains. VZ also goes for 13.5x this year's expected earnings versus ~15x for the overall market.

Verizon has a couple of major things going for it over AT&T. Its 4G network build out is much further along which means the company is not experiencing the free cash flow hit that AT&T is in building out their remaining network. The company should also benefit from its recent deal to buy the remaining 45% of Verizon Wireless from Vodafone (NASDAQ:VOD) it does not already own. Finally, the company is adding more subscribers than any other domestic telecom.

Verizon is not a home run stock. However, with a 4.5% yield, a low beta (.34) and reasonable valuations it should outperform the market if equities continue to be volatile. I will be picking up a position the next time we get a significant drop in the market. Sometimes slow and steady wins the race. ACCUMULATE

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in VZ over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.