For about a year now the broader stock market as measured by the S&P 500 is down nearly 2.6% having never touched positive territory other than a couple of times in June and July of last year. It would see multiple corrections of a little more than 10% and jump back up to nearly neutral ground before correcting again. Right now the charts show the market back up near the top again, making almost a perfect SIN curve, that great mathematical function we all learned and loved back in geometry class.
There is a lot of pessimism around us these days and with the market near the top of that SIN curve again it almost bodes for a correction. We always hear the saying, "sell in May and go away", but that saying has yet to manifest itself so far as the market is up 0.1% so far in the month. So should an investor view Monday's rally with optimism or as a chance to sell shares of an overvalued stock in their portfolio?
I believe that we're at an inflection point where things can either break out of this SIN curve to the up side or continue to follow the SIN curve. Things still look to be dangerous out there so I'm going to adopt the position of being a bit pessimistic by investing in "feel good" dividend stories. And appropriately so, companies that operate in America strictly. These types of dividend companies act as shields for a portfolio by providing protection in the form of dividends.
This brings me to Verizon (NYSE:VZ). During the time that the S&P 500 has been waffling Verizon mimicked it, but then finally broke out in mid-January as shown in the chart below. Verizon has gained nearly 20% from its mid-January price level to early April but has experienced a pullback of late. The pullback was due primarily to a strike with some of its union employees. But I believe this will be a short-lived issue and the stock should bounce back. In its current state the company's dividend yields 4.4%. Earnings are projected to grow by 2.5% in 2017 from 2016 numbers and 3.6% in the long-term and with the company cutting costs which in effect boosts margins I see those numbers going higher if they can sell even more devices going forward, especially if they can keep the churn numbers low.
The company currently trades at a trailing 12-month P/E ratio of 11.64, which is inexpensively priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 12.88 is currently inexpensively priced for the future in terms of the right here, right now. The forward P/E value that is higher than the trailing twelve month P/E value tells us the story of earnings contraction in the next year. However, next year's estimated earnings are $3.98 per share while the trailing twelve month earnings per share were $4.4, I never like that. Next year's estimated earnings are $3.98 per share and I'd consider the stock inexpensive until about $60. The 1-year PEG ratio (4.71), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is expensively priced based on a 1-year EPS growth rate of 2.47%.
On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 4.41% with a payout ratio of 51% of trailing 12-month earnings while sporting return on assets, equity and investment values of 7.4%, 120.6%, and 18.4%, respectively, which are all respectable values. The really high return on equity value (120.6%) is an important financial metric for purposes of comparing the profitability, which is generated with the money shareholders have invested in the company to that of other companies in the same industry. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 4.41% yield of this company is good enough alone for me to take shelter in for the time being. The company has been increasing its dividends for the past eleven years at a 5-year dividend growth rate of 3%.
I currently own the stock for my ESPP account and it accounts for roughly 21.8% of the total portfolio value so I'm a bit over exposed in the name right now. I like to be around 20% or less as a maximum position so I'll be writing some calls against the name to capture some upside while collecting a premium in an attempt to lower my exposure a bit in the name for right now. Thanks for reading and I look forward to reading your comments.
Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!
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.