Company Description: Verizon Communications Inc. is the largest U.S. wireless carrier. Verizon also offers wireline and broadband services primarily in the northeastern U.S.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
VZ is trading at a discount to only 3.) above. Since VZ's tangible book value is not meaningful, a Graham number cannot be calculated. The stock is trading at a 65.4% premium to its calculated fair value of $30.05. VZ did not earn any Stars in this section.
Dividend Analytical Data: In this section, there are three possible Stars and three key metrics; see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
VZ earned one Star in this section for 1.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The company has paid a cash dividend to shareholders every year since 1984 and has increased its dividend payments for 10 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high-yield MMA. Two items are considered in this section; see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
The NPV MMA Diff. of the $815 is below the $2,500 target I look for in a stock that has increased dividends as long as VZ has. The stock's current yield of 4.3% exceeds the 2.98% estimated 20-year average MMA rate.
Memberships and Peers: VZ is a member of the S&P 500. The company's peer group includes: AT&T Inc. (NYSE:T) with a 5.2% yield (see full analysis of AT&T here), CenturyLink, Inc. (NYSE:CTL) with a 5.3% yield and Sprint Corporation (NYSE:S) with a 0.0% yield.
Conclusion: VZ did not earn any Stars in the Fair Value section, earned one Star in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of one Star. This quantitatively ranks VZ as a 1-Star Very Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $31.44 before VZ's NPV MMA Differential increased to the $2,500 minimum that I look for in a stock with 10 years of consecutive dividend increases. At that price, the stock would yield 6.8%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,500 NPV MMA Differential, the calculated rate is 7.4%. This dividend growth rate is higher than the 2.8% used in this analysis, thus providing no margin of safety. VZ has a risk rating of 2.25, which classifies it as a Medium risk stock.
As the Communication Services sector continues to move more toward wireless products, VZ is well-positioned to maintain its market leadership and continues to grow its market share despite premium pricing compared to its major rivals. The company's focus is on lowering the debt level resulting from the $130 billion buyout of Vodafone Group plc's (NASDAQ:VOD) 45% interest in Verizon Wireless. The buyout will provide a competitive advantage over peers and greater financial synergies. Over the next year, VZ will see benefits from new wireless data plans and FiOS success, along with short-term demand spike impacts from new smartphone launches such as the iPhone 6 and 6 plus.
Following in AT&T's and T-Mobile's (NASDAQ:TMUS) footsteps, VZ is exploring the potential benefits of divesting its cell towers. Based on AT&T's per tower valuation, VZ could receive around $6 billion for its approximately 12,000 towers. The company has hired investment bank Tap Advisor LLC to assist in the transaction. The proceeds could be used to pay down debt and purchase additional spectrum from the Federal Communication Commission.
The company enjoys strong cash flow generation and a perception of network quality and pricing power over its suppliers. The stock is currently trading at a premium to my calculated fair value of $30.05. Its low dividend growth rate of 2.8% and valuation keep me from adding the stock to my Dividend Growth Portfolio. However, I do hold the stock in my High-Yield Portfolio.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion.
Full Disclosure: At the time of this writing, I was long in VZ (6.0% of my High-Yield Portfolio) and long in T in my Dividend Growth Portfolio. See a list of all my dividend growth holdings here.
Disclosure: The author is long VZ, T. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.