Here Is Why I Like Verizon The Most In The Telecom Sector

Jul.16.12 | About: Verizon Communications (VZ)

Verizon Communications (NYSE:VZ) is currently my top pick in the US telecommunication sector. At $45.21 per share, which is just slightly off from the 52-week high of $45.29, Verizon is trading at 5.8x the NTM EBITDA and 17.5x the NTM EPS. Despite a 1-year return of 22.59%, I believe there remains a solid upside for this quality dividend stock given its cheap valuations and sustainable dividend yields. My view is based on the following three reasons:

1. Verizon's stock is attractively priced (see table below). Compared with the peers, Verizon has a better growth potential as reflected by its above-average estimated 2-year CAGRs for EBITDA and EPS. The company is also very profitable, especially for its investment returns as both ROE and ROIC are superior to the peer averages.

In addition, Verizon has a solid FCF margin and is able to maintain a relatively low debt level. This helps in achieving a fairly high interest coverage ratio. Both the current and quick ratios are also above peer averages, suggesting its balance sheet is fairly liquid. Accounting for all those, it makes almost perfect sense for Verizon to trade at a premium valuation. Nevertheless, the current stock price of $45.21 actually implies a 2.1% valuation discount on both the peer average P/E and EV/EBITDA multiples, indicating Verizon is not getting the deserved credits for its superior financials and growth prospects.

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2. Annual dividend per share has gradually increased at a 21-year CAGR of 2.5% since FY1990, reflecting management's commitment of returning capital to investors (see chart below).

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3. Over the past few years, annual dividend payments only represent less than a half of the company's free cash flows, implying Verizon has a capacity to at least maintain the current pace of dividend growth down the road, and likely spend the additional funds in repurchasing shares.

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In the light of its excellent financial performance, attractive valuations, and sustainable dividend yield, Verizon is already one of my core investment holdings, and I recommend buying the shares now.

Comparable analysis table and FCF chart are created by author, dividend per share chart is sourced from Capital IQ, and all financial data is sourced from Morningstar and Capital IQ.

Disclosure: I am long VZ.