Time To Consider Verizon Communications

| About: Verizon Communications (VZ)

Summary

In my view, VZ should be included in every diversified large cap dividend stocks portfolio. Verizon is generating strong free cash flow, and the dividend yield is high at 4.52%.

I see robust growth prospects for the company. Verizon remains committed to consistently investing in its networks for the future.

VZ's valuation is pretty good. The trailing P/E is very low at 11.44, the forward P/E is low at 12.28, and the Enterprise Value/EBITDA ratio is very low at 6.36.

According to Portfolio123's "Momentum Value" ranking system, VZ's stock is ranked second among all 34 Russell 3000 telecommunication stocks.

The average target price of the top analysts is at $52.33, up just 4.7% from its February 10 close price, however, in my opinion, shares could go much higher.

In my view, Verizon Communications (NYSE:VZ) stock should be included in every diversified large cap dividend stocks portfolio. The company is generating strong free cash flow, and the dividend yield is high at 4.52%. In September 2015, Verizon's board approved a 2.7% dividend increase which raised its annualized dividend to $2.26 per share. This was the ninth consecutive year that its board approved a dividend increase, affirming their confidence in the strength of the company's future cash flows. The company's free cash flow in 2015 was at $21.2 billion while its paid dividends were at $8.5 billion, making the full year free cash flow dividend payout ratio 40%.

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Source: 4Q 2015 Presentation

Since the beginning of the year VZ's stock is up 8.1% while the S&P 500 Index has decreased 9.4%, and the Nasdaq Composite Index has lost 14.5%. However, since the beginning of 2012, VZ's stock has gained only 24.6%. In this period, the S&P 500 Index has increased 47.3%, and the Nasdaq Composite Index has risen 64.4%. According to TipRanks, the average target price of the top analysts is at $52.33, up just 4.7% from its February 10 close price, however, in my opinion, shares could go much higher.

VZ Daily Chart

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VZ Weekly Chart

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Charts: TradeStation Group, Inc.

On January 21, Verizon reported its fourth-quarter 2015 financial results, which beat EPS expectations by $0.01 (1.1%). The company posted revenue of $34.3 billion in the period, surpassing the consensus estimate of $34.1 billion. Verizon showed earnings per share surprise in all its previous four-quarters, as shown in the table below.

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Data: Yahoo Finance

In the report, Chairman and CEO Lowell McAdam said:

In 2015, Verizon delivered strong and balanced results in a dynamic competitive environment while returning more than $13.5 billion to shareholders. At the same time, Verizon built and acquired next-generation network capabilities that position the company to be an innovator in the digital-first mobile world in 2016 and beyond.

On the fourth-quarter conference call, CFO Fran Shammo said that the company is confident in its three-tier strategy of leading at the network connectivity level in the markets it serves, developing new business models through global platforms in video and Internet of Things, and creating certain opportunities and applications and content for incremental monetization. According to Mr. Shammo, execution model enables Verizon to compete effectively in every market condition and build its capabilities for future growth and profitability as an innovator in the digital-first mobile world in 2016 and beyond.

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Source: 4Q 2015 Presentation

Verizon wireless segment accounted for 69.7% of the company revenues in 2015, and the total wireless revenue grew 4.6% year-over-year. However, what is most encouraging, in my opinion, is the margin expansion. Segment EBITDA margin increased to 38.4% in the last quarter from 32.6% in the same quarter a year ago. For the total year 2015, wireless EBITDA margin was at 42.5% compared to 40.2% in the previous year.

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Source: 4Q 2015 Presentation

In my view, the strength and the leading position of Verizon's wireless business can be deduced from its behavior in front of the competition. Despite increased competition from T-Mobile (NASDAQ:TMUS) and extreme discounts from Sprint (NYSE:S), Verizon has repeatedly emphasized that it is looking for profitable subscriber growth rather than trying to follow T-Mobile and Sprint cut-rate offers. That can be seen in the company's operating metrics. Verizon added 1.5 million net postpaid subscribers in the fourth quarter of 2015, of which 449,000 were postpaid phone net adds.

I see robust growth prospects for the company. Verizon remains committed to consistently investing in its networks for the future. Its 2015 investments have positioned it for growth and allow it to maintain its network leadership position, as consistently acknowledged by third parties. Wireless densification enables the company to add capacity to manage the growing trends of video consumption and the demand required for the Internet of Things, as well as prepositioning it for the future 5G technology. Verizon invested in AWS-3 spectrum during the year, acquiring spectrum covering 480 markets with a total value of $10.4 billion. Verizon continued to invest in its 4G LTE network to provide the industry's highest reliability and position it to capture the efficiencies and capabilities of new technologies. The company is expanding capacity through a number of optimization techniques, effectively managing its spectrum, and further successfully densifying urban markets. According to the company, national studies recognize Verizon as the overall 4G LTE network performance leader, leading in categories of overall performance, network reliability, network speed, data performance and call performance. These are the performance metrics that matter to the customer. Wireline broadband Internet and fiber optic TV services [Fios] are also growth areas for Verizon. Fios continues to be the driver of consumer revenue growth. Total Fios revenue grew 6.8% in the last quarter compared to the same quarter a year ago.

Verizon has been paying uninterrupted dividends since 1983. The forward annual dividend yield is high at 4.52% and the payout ratio is at 50.9%. The annual rate of dividend growth over the past three years was high at 3.4%, over the past five years was at 3.0%, and over the past ten years was at 3.2%.

VZ Dividend Chart

VZ Dividend data by YCharts

Verizon has also resumed share buybacks, and repurchased $5.1 billion of its stock in 2015.

Valuation

VZ's valuation is pretty good. The trailing P/E is very low at 11.44, and the forward P/E is also low at 12.28. Furthermore, the Enterprise Value/EBITDA ratio is also very low at 6.36.

Ranking

According to Portfolio123's "Momentum Value" ranking system, VZ's stock is ranked second among all 34 Russell 3000 telecommunication stocks, as shown in the table below.

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The "Momentum Value" ranking system is quite complex, and it is taking into account many factors like; Yield, price to book value, trailing P/E, price to sales, return on equity, sales growth, and relative strength, as shown in the Portfolio123's chart below.

Back-testing over sixteen years has proved that this ranking system is very useful; the reader can find the back-testing results of this ranking system in this article.

Summary

In my view, VZ's stock should be included in every diversified large cap dividend stocks portfolio. The company is generating strong free cash flow, and the dividend yield is high at 4.52%. The company's free cash flow in 2015 was at $21.2 billion while its paid dividends were at $8.5 billion, making the full year free cash flow dividend payout ratio 40%. I see robust growth prospects for the company. Verizon remains committed to consistently investing in its networks for the future. Its 2015 investments have positioned it for growth and allow it to maintain its network leadership position, as consistently acknowledged by third parties. VZ's valuation is pretty good. The trailing P/E is very low at 11.44, the forward P/E is also low at 12.28, and the Enterprise Value/EBITDA ratio is very low at 6.36. Furthermore, according to Portfolio123's "Momentum Value" ranking system, VZ's stock is ranked second among all 34 Russell 3000 telecommunication stocks. The average target price of the top analysts is at $52.33, up just 4.7% from its February 10 close price, however, in my opinion, shares could go much higher.

Disclosure: I am/we are long VZ.

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.