This article is about Verizon Communications Inc. (NYSE:VZ) and why its dividend income company that is being reviewed by The Good Business Portfolio. Verizon Communications Inc. is a holding company. The Company, through its subsidiaries, provides communications, information and entertainment products and services to consumers, businesses and governmental agencies. The Company offers voice, data and video services and solutions on its wireless and wire line networks. Fundamentals of Verizon Communications Inc. will be looked at in the following topics, The Good Business Portfolio Guidelines, Total Return And Yearly Dividend, Last Quarter's Earnings, Company Business Overview, and Takeaways And Recent Portfolio Changes.
Good Business Portfolio Guidelines.
Verizon Communications Inc. passes 9 of 10 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. There are many good business companies that don't break many of these guidelines but will still not be considered for the portfolio at this time. For a complete set of the guidelines, please see my article "The Good Business Portfolio: All 24 Positions." These guidelines provide me with a balanced portfolio of income, defensive and growing companies that keeps me ahead of the Dow average.
Verizon Communications Inc. is a large-cap company with a capitalization of $229.0 billion. Verizon Communications Inc. has good steady free cash flow of $4 Billion reported in the last quarter to be used to expand its wire line and wireless networks. The only real competitor is AT&T Inc. (NYSE:T) with a capitalization of $267 Billion who is also expanding its business mainly in the wireless network compared to Verizon Communications Inc. The real winner in this battle is the consumer who will get more capability at the best lower price.
Verizon Communications Inc. has a dividend yield of 4.0% and its dividend has been increased for ten of the last ten years. The payout ratio of the dividend is moderate at 63%. The dividend is above average for the market but constant yearly increases of 2.5% make it a choice for the dividend income investor who wants to own a quality business. Remember one of my guidelines, think of yourself as an owner of the business, you are, would you buy the whole company if you could.
Verizon Communications Inc. therefore is a dividend income story with the company to continue to add new wireless bandwidth and wire line infrastructure for growth. At the last stock holders meeting management said they added 640 Thousand wire line customers.
Verizon Communications Inc. last quarterly earnings was good at $1.06/share which leaves Verizon Communications Inc. good cash flow, allowing it to pay its above average dividend and have some left over for its continued growth investments. The average dividend payout ratio over the last 3 years is 63%, a bit high but not excessive.
I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.1% of the portfolio as income and I need 1.9% more for a yearly distribution of 5%. Verizon Communications Inc. has a three-year CAGR of 2% less than meeting my requirement. Looking back five years $10,000 invested five years ago would now be worth over $18,772 today (from S&P IQ). This makes Verizon Communications Inc. a good investment for the dividend income investor with its steady 4% dividend and constant slow earnings growth.
Verizon Communications Inc. S&P Capital IQ rating is three star or hold with a target price of $51. Verizon Communications Inc. is then fairly priced at present but a good choice for the dividend income investor that wants a constant income they can count on and keeps even with inflation.
Total Return And Yearly Dividend
The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio. Verizon Communications Inc. did better than the Dow baseline in my 42.0 month test compared to the Dow average. I chose the 42.0 month test period (starting January 1, 2013) because it includes the great year of 2013, the moderate year of 2014, the losing year of 2015 and the higher year of 2016 YTD. Modeling the Dow average is not an objective of the portfolio but just happened by using the 10 guidelines as a filter for company selection. The fair total return makes Verizon Communications Inc. appropriate for the slow growth investor and the 4.00% dividend good for the dividend income investor. The dividend is above average for the market and is easily covered by the earnings. The dividend has been increased for 10 of the last ten years. The dividend should be increased in September and is estimated to be increased to $0.58/Qtr. from $0.565/Qtr. DOW's 42.0 month total return baseline is 36.97%. The total return during the test period for VZ is good at 43.90% beating the DOW baseline by 6.93%.
Dow Baseline 36.97%
42.0 Month total return
Difference from DOW baseline
Yearly Dividend percentage
Last Quarter's Earnings
For the last quarter on April 21, 2016 Verizon Communications Inc. reported earnings that beat expected earnings at $1.06 compared to last year at $1.02 and expected at $ 1.05. Revenue was higher at $32.2 Billion or +.6% year over year increase but $320 Million less than expected revenue. This was a fair report. Verizon Communications Inc. guided their total earnings to be the same as 2015 for the year. They also said margin has remained at 24.7%. The steady growth in Verizon Communications Inc. should provide a company that will continue to have average total return and provide steady income for the dividend income investor.
Verizon Communications Inc. is a holding company. The Company, through its subsidiaries, provides communications, information and entertainment products and services to consumers, businesses and governmental agencies. The Company offers voice, data and video services and solutions on its wireless and wire line networks. The Company's segments include Wireless and Wire line. The Wireless segment offers communications products and services, including wireless voice and data services and equipment sales that are provided to consumer, business and government customers across the United States. The Wire line's segment offers voice, data and video communications products and services, such as broadband video and data, corporate networking solutions, data center and cloud services, security and managed network services and local and long distance voice services. The Company provides these products and services to consumers as well as to carriers, businesses and government customers. At the last earnings call the CEO of Verizon Communications Inc. said. that in the quarter 640 Thousand net wireless additions and 98 Thousand wire line additions were made with 36 thousand of these including video. VZ intends to build up the network in Boston with new fiber to a 5G capability. Also the churn rate was 0.96% a reduction of 7 basis points. This growth in both wire line and wireless markets is going on to keep VZ on its steady moderate growth course as new speed capability is designed.
Takeaways and Recent Portfolio Changes
Verizon Communications Inc. is an investment for the dividend income investor at a fair price now. Considering Verizon Communications Inc. steady dividend growth of 2.5%, its current dividend yield of 4.0% and its above average total return than the Dow average, Verizon Communications Inc. will be considered for The Good Business Portfolio when a open slot is available.
Sold small position of spin off Fortive (NYSE:FTV) to keep number of positions at 25 or less.
Bought more of Eaton Vance Enhanced Equity Fund II (NYSE:EOS) bringing it up to 7.0% of the portfolio.
Sold some covered calls on Harley Davidson (NYSE:HOG), sold July 45's. If the premium gets to 20% of the sold premium price, I will buy them back with the hope that HOG goes up so I can sell the calls again in the same month for a double. Bought to close all HOG options on the Brexit dip and made a few dollars. On Friday July 1 there were rumors that HOG may be bought out and it jumped up 18%. I will wait a while to see what develops before selling more calls or trimming the position.
The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. Below are the six top positions in The Good Business Portfolio. Johnson and Johnson (NYSE:JNJ) is 8.7% of the portfolio, Altria Group Inc. (NYSE:MO) is 8.2% of the portfolio, Home Depot (NYSE:HD) is 7.8% of portfolio, Boeing (NYSE:BA) is 7.6% of the Portfolio, Eaton Vance Enhanced Equity Fund II is 7.0% of the Portfolio and Walt Disney (NYSE:DIS) is 6.7% of the portfolio, therefore MO and JNJ are now in trim position with Boeing, Home Depot, Eaton Vance equity Fund II and Walt Disney getting close. Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on individual 787 plane costs, announced in the 2015 fourth quarter earnings call. In the first quarter of 2016 deferred costs were $141 Million and deceasing as the year goes on. Deferred costs should start to decrease in the coming quarters and positive cash flow from the 787 program start to happen. JNJ will be pressed to 9% of the portfolio because it's so defensive in this post Brexit world.
For the total Good Business Portfolio please see my recent article on Good Business Portfolio: 2016 first-quarter earnings and performance for the complete portfolio list and performance. Become a real time follower and you will get each quarters performance after the earnings season is over.
I have written individual articles on CAB, JNJ, EOS, GE, IR, MO, BA, Omega Health Investors and HD that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest please look for them in my list of previous articles.
Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.
Disclosure: I am/we are long BA, HD, DIS, HOG, EOS, JNJ, MO.
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.