Verizon: A Deep-Seated Buyer

| About: Verizon Communications (VZ)

Summary

Verizon is the largest wireless service provider in the United States.

The company's share price is in a long-term uptrend.

The agreement to acquire Yahoo! is beneficial and shows beyond doubt the persistent strategy of the company.

Following my last article I will continue to build a portfolio of valuable companies ("Unbeatable Stocks With Everlasting Dividends") with great market position and significant long-term perspectives which pay increasing dividends. This is the fifth company selected and I will add five others soon which will take into account several crucial factors mentioned below.

With a track record of good results and solid dividends Verizon (NYSE:VZ) is one of the most appealing companies in the stock market. VZ has always been ahead of competitors in terms of technological progress, and is the largest wireless service provider in the United States.

The company has a history of huge acquisitions in which Vodafone with a $130B deal was the third-largest ever. Now, VZ seems to have a definitive agreement to acquire Yahoo! (NASDAQ:YHOO), which may be a very interesting move for advertising technology in association with AOL.

Verizon meets the crucial factors for the components of this portfolio:

  • Excellent generation of free cash flow
  • Sound earnings per share and strong valuation
  • Stock appreciation over the years
  • Very limited drawdown potential
  • Dividend yield of around 3% (including dividend growth)

As of Mar 31, 2016, Verizon's levered free cash flow (LFCF) was $18.90B and it had 4.08B shares outstanding. Levered free cash flow per share was: $18.90/4.08= $4.63 per share.

Taking VZ's last closing price of $56.10 and dividing that by $4.63, we get 12.11. It means that the company is trading around 12 times its LFCF which is a striking result.

By company's outlook, we have EPS of ~$4.40 for full-year 2016. Taking a forward P/E of 14 we arrive at a current value of $61.60 per share. However, it is not included here the potential for new businesses and the company's remarkable ability to enhance its market position. We may use a basic discounted cash flow (DCF) analysis with very conservative assumptions:

  • Adjusted FCF at 2% CAGR reaching ~$22.95B in 5 years
  • A 20x multiple against FCF in 5 years gives Terminal Value
  • WACC (Discount Rate): 8%
  • Cash minus debt: -$104.15B

Thus, with a total market value of ~$296B and supposing that there will be the same number of fully diluted shares outstanding (4.08B), we arrive at a value of $72.58 per share.

Click to enlarge

Chart courtesy of StockCharts.com

To evaluate the margin of safety of this stock we are going to analyze the extent of its downfall in market crashes. The 11-year weekly chart above has its historical price data adjusted in order to remove gaps caused by stock splits, dividends and distributions. By making these adjustments all price movements are caused by pure market forces.

Share prices have been always rising except in the Great Recession. In fact, following a top at $27.68 in late 2007, share prices plunged to $14.59 a year later - a 47.30% fall. At the end of 2010 stock prices have recovered completely and have resumed since then its strong uptrend, showing no risk of reversal. Prices have stayed generally above EMA(50) and EMA(200). The first moving average has always stayed above the latter and both point upwards.

Being a solid dividend growth stock, VZ currently pays $2.26 per share which represents a dividend yield of 4%. The company has increased its dividend over the past 10 years.

Conclusion

Verizon has a decisive importance in the US wireless market and does not hesitate to grow through the acquisition of companies that may be highly relevant to its business development. VZ generates solid cash flow, has the potential to grow, and continues to show strong earnings power. The agreement to acquire Yahoo! is beneficial and shows beyond doubt the persistent strategy of the company. Although its long-term outlook is impressive investors should take advantage of any small correction that may provide a great chance to buy or add more shares. In this case, investors would enjoy an even better dividend yield and a remarkable risk/reward.

Note: This virtual portfolio is only intended to be a guide for investors.

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 author of this article gives only his personal view and opinion, never making any investment advice to buy or sell specific securities. Investors in financial assets must do so at their own responsibility and with due caution as they involve a significant degree of risk. Before investing in financial assets, investors should do their own research and consult a professional investment adviser.