Is The Rally Over For Verizon?

| About: Verizon Communications (VZ)

Summary

Verizon has rallied $9 in the last two months defying the volatile market to start 2016.

The stock now trades at the low end of the dividend yield over the last decade, reducing the safety of buying the stock.

The way Verizon traded on Friday suggests investors step away from any aggressive position in the stock for now.

The market finally caught on that the domestic wireless war wasn't going to drag Verizon Communications (NYSE:VZ) earnings down. Combined with energy companies cutting dividends, the relative safety of this dividend sent the stock soaring this year.

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Verizon now trades near the 2013 high and approaching the all-time high over $65 back in 1999. The stock though has seen a surge from the start of the year after hitting a low of $44. The trading action on Friday signaled a potential top in the stock, but should investors necessarily dump Verizon after this rally?

VZ Chart

VZ data by YCharts

Safety Reduced

My investment thesis on Verizon turned bullish last year as the stock had flat lined for a couple of years while the company produced improving results. The fears of the domestic wireless pricing war never impacted the company to the extent expected.

At the same time, Verizon successfully raised the dividends similar to how the wireless provider did through the financial crisis. The ability to consistently raise dividends during the financials crisis and the pricing war provided a level of safety that a lot of other dividend stocks didn't provide earlier this year. Now though, the yield has declined to 4.2%.

VZ Dividend Yield (<a href=

VZ Dividend Yield (TTM) data by YCharts

The big problem is that over the last 10 years the stock hasn't spent much time with a dividend yield below the current level. Either Verizon needs to raise the dividend or the stock isn't likely to surge that much farther based on these numbers.

With flat earnings this year and possibly some free cash flow expansion on lower capital spending, Verizon is probably in a position for a normal dividend hike of $0.015. The company though might want to pay down the $110 billion in debt as interest rates are likely to rise over the next couple of years. Even in this low interest rate environment, Verizon spent nearly $5 billion on interest expenses last year.

Needs A Catalyst

One of the theories that Verizon was worth an investment back in the low $40s were several catalysts on the horizon. Between mobile video and digital advertising, the company had the ability to move beyond strictly wireless subscription revenues and better utilize the wireless network.

At this point, none of these catalysts have panned out. The Go90 mobile video service is off to a slow start. UBS highlights how it ranks No. 20 against other entertainment apps. The fact that Verizon hasn't disclosed user details is likely a factor of the limited success of the mobile offering.

While Verizon continues working to figure out how to build revenue streams with their wireless assets, the stock is reasonably attractive at these levels. Earnings and cash flows are strong though unlikely to grow too much with the domestic wireless market saturated.

The wireless provider is pushing into 5G wireless technology that provides speeds of up 50 times the current throughput of 4G LTE. The company is already conducting trials of the service with a commercial launch potentially in 2017. The one big hiccup is that 5G doesn't have an approved standard yet leaving Verizon out in a bleeding edge position of building a network based on technology that might not get approval.

Takeaway

The large rally in Verizon leaves the stock more fairly valued. Without any catalysts working out and the dividend yield at the low end of the typical range, the stock is more of a yield play now without the capital appreciation expectations from last year. In the short term, the reversal and close at the lows on Friday suggests the stock hit a peak for now.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.