Verizon's Dividend Is Inferior To That Of AT&T

| About: Verizon Communications (VZ)

Verizon Communications (NYSE: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 (NYSE: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.