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.
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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:
| Year | Dividend | Growth |
|---|---|---|
| 2002 | $1.54 | 0% |
| 2003 | $1.54 | 0% |
| 2004 | $1.54 | 0% |
| 2005 | $1.62 | 5.19% |
| 2006 | $1.62 | 0% |
| 2007 | $1.67 | 3.09% |
| 2008 | $1.78 | 6.59% |
| 2009 | $1.87 | 5.06% |
| 2010 | $1.925 | 2.94% |
| 2011 | $1.975 | 2.6% |
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 |
|---|---|---|---|
| 2002 | $10,116 | 2,745 | 41.79% |
| 2003 | $10,598 | 2,789 | 40.53% |
| 2004 | $8,561 | 2,831 | 50.93% |
| 2005 | $6,688 | 2,817 | 68.23% |
| 2006 | $7,005 | 2,938 | 67.95% |
| 2007 | $8,201 | 2,902 | 59.09% |
| 2008 | $9,382 | 2,850 | 54.07% |
| 2009 | $14,518 | 2,841 | 36.59% |
| 2010 | $16,905 | 2,833 | 32.26% |
| 2011 | $13,536 | 2,839 | 41.42% |
The payout ratio has varied widely from year to year, and the range is comparable to that of AT&T.
Valuation
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.
Conclusion
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.
