Verizon Communications (VZ) is a local phone company serving 25% of the U.S. population, as well as the majority owner of Verizon Wireless, which serves nearly 100 million customers across the United States.
The main competitor to Verizon is AT&T (T), which I have written about here. I will refer to my valuation of AT&T in the remainder of this article. Let's see how Verizon stacks up against AT&T as a dividend stock. Verizon currently trades at $38.73, with a projected yield of 5.16%. Here's the ten-year dividend history:
The dividend growth for Verizon has been slow and inconsistent, with multiple years of no dividend growth. I'll calculate the payout ratio as a fraction of free cash flow. The results are shown below.
|Year||Free Cash Flow (Mil $)||Float (Mil Shares)||Payout Ratio|
The payout ratio has varied widely from year to year, and the range is comparable to that of AT&T.
I will use the Dividend Discount Model to put an estimated value on the company. This model assumes that the value of a company is purely the sum of all future dividends discounted back to today. This is a reasonable valuation method if you are a dividend investor. The discount rate should be your required rate of return, and I will use a discount rate of 8%, which is roughly the long-term growth rate of the market as a whole. I will assume that the dividend will grow by 2% in perpetuity, which is the same assumption I made for AT&T. Using these parameters I arrive at an estimated fair value of $33.58 for a share of Verizon.
Verizon currently trades about 15% above my fair value estimate while, from my previous article, AT&T trades about 5% above its fair value estimate. Both stocks offer high yields and slow dividend growth, but AT&T's dividend offers better value than that of Verizon. For a dividend investor looking to add a telecom to their portfolio, AT&T appears to be the better choice.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.