Is This 4.9% Dividend Yield Still A Buy?
Summary
- Verizon has managed to maintain a dividend yield above 4% for the better part of this last decade.
- Verizon said that it added 1.2 million retail postpaid net customers in the fourth quarter as its 2017 net adds showed growth of 1.8 percent.
- Verizon’s forecasted earnings are for 21.69% increase this year, but averaging off to a 5.41% over the next years.
Verizon’s (NYSE:VZ) closing price on March 29, 2018, was $47.82. Based on that closing price, Verizon has a market cap of $188.8 billion—the second-largest among all major US wireless service providers. Verizon’s 52-week low stands at $42.80, while its 52-week high is $54.77.
Source: mainepublic.org
Verizon has managed to maintain a dividend yield above 4% for the better part of this last decade. Its business model is overall very attractive and even with its revenue being slightly down it has managed to keep its head above water by increasing its net income. It has managed to lower its payout ratio over the last few years and continues to remain very competitive with its dividend yield being at 4.9%. As such, I would still consider Verizon to be a buy at this time because it has a competitive dividend yield with a long history of increases.
The company has continued to perform well over the past few years. It subscriber rate has increased. Verizon said that it added 1.2 million retail postpaid net customers in the fourth quarter as its 2017 net adds showed growth of 1.8 percent.
Source: statista.com
Its churn rate has continued to be one of the lowest rates amongst the four major carriers as seen in the graph below.
Source: marketrealist.com
The average revenue per user of Verizon Wireless was at 54.67 U.S. dollars. This compares to AT&T ARPU being $51.12 and T-Mobile at $43.14.
Revenue growth increased by 4.99% last year to $33.96 million. It's net income growth increased by 315.33%. Its earnings per share increased by 315.55% from $3.22 to $7.37 between 2016 and 2017.
Verizon increased its dividend last summer from $0.5775 to $0.59. It currently holds a dividend yield of 4.9% which is too attractive to not pass up.
Verizon’s dividend yield is currently at sitting at 4.94% with an annualized payout of $2.36. Its payout ratio is 51.94%. It has been paying dividends for 11 years. It has consistently increased those dividend payments over the last 11 years. Verizon’s P/E ratio is at 6.49 now with a forward P/E ratio of 10.29.
Verizon’s forecasted earnings are for 21.69% increase this year, but averaging off to a 5.41% over the next years.
This meets my criteria for things you would want to look for in a stock that has strong dividend growth and a bright future ahead of it.
Source: Morningstar
Verizon topped analyst’s expectations when they reported their fourth-quarter earnings. With a total revenue of $34 billion, they posted their first year-over-year revenue growth in two years. For the company as a whole, their revenue was $126 billion, down about 2% excluding divestitures and acquisitions.
The larger picture is that their revenues have generally been stable over the last five years with a few ups and downs. In 2016 it is estimated that they spent about $2.74 billion in marketing expenses. Verizon’s ROIC (return on invested capital) was 7.65% in 2017. This similar to AT&T’s (T) at 7.09%.
Verizon recently announced that it was buying 37 million miles of fiber to boost its wireless network. It struck this deal with Corning to purchase 37 million miles of fiber and related hardware that it feels will boost capacity in its wireless network.
Source: Morningstar
Verizon payout ratio has been as low as 44%, in 2014 to as high as 654% in 2012. Since 2015 its payout ratio has been in decline. The fact that Verizon is decreasing its payout ratio is a good thing. However, given that it has paid out as much as 654% in the past means that the company is going to have to continue increasing its earning power to continue to lower its payout ratio. Its earnings per share have largely stayed above its dividend price and this would seem to be good news for shareholders.
Consecutive Years Of Dividend Yield Increases
Source: Morningstar
A chart would show this better. However, from looking at this we can see that the price is following the dividend yield higher at a consistent rate. For example, in 2013 the price was $0.53 and if you add 4.40% to $0.53 you will get $0.55. In other words, the dividend yield and the price match up exactly. This is what you are looking for at a dividend yield and price. You want them to match up as close as possible for a majority of the time.
The current P/E ratio is 6.49 with a forward P/E of 10.26. This P/E ratio is at an all-time low right now. In the last five years, the highest it has been is 124 in April of 2013 and the lowest it has been at is where it is at the present time. Since January of 2014, it has largely stayed in the low teens. With its highest level being at 19 in January of 2016.
In order to consider if this stock is fairly valued we need to match these numbers up with their earnings per share.
- December 2017: EPS $7.37 (+128%)
- December 2016: EPS $3.22 (-26%)
- December 2015: EPS $4.38 (+80%)
- December 2014: EPS $2.42
While these numbers do bounce there is a consistency of growth that I see in them. Verizon’s forecasted earnings in 2018 are expected to be 21.69% and leverage down to 5.41% over the next five years.
Is Verizon Really Fairly Valued?
Verizon’s intrinsic stock value is $35.47. This number is based on the 6-year free cash flow average, total equity, and free cash flow growth assumptions. It is based on this formula; Value = (Growth Multiple)*FCF(6 year avg) + 0.8*Total Equity(most recent). This equation is based on free cash flow and total equity. We are using a 6-year average of free cash flow to get a better average in these numbers. There are different ways to arrive at this number that I plan on covering in future articles. However, if this number is true then that would inherently mean that Verizon stock is overvalued since it is trading at $47.82.
The Final Takeaway
Verizon has continued to increase its dividends the last 11 years and with a payout ratio of 51% that appears to be headed in the right direction.The last two years, Verizon has increased its dividend by 2.2% in each year. The dividend yield has held steady above 4% for most of this past decade and has crept into the 5% range as recently as 2017. Most investors would still consider that to be a very attractive dividend yield. I am still bullish on Verizon.
Verizon continues to increase its subscribers and has one of the lowest churn rates in the industry. While its revenues have been slightly down the past few years, it has been able to increase its net income. The stock would appear to be overvalued, but this does not appear to be affecting its dividends. I am optimistic in the direction that its dividends will continue to go and I expect it will be able to keep its dividend yield above 4% for many years to come.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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