Valuation And Dividend Safety Analysis: Verizon (VZ)

Valuation And Dividend Safety Analysis: Verizon (VZ)
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Verizon Communications Inc. (NYSE:VZ) is one of three companies controlling the wireless market in the US. In addition, the company has a strong presence in broadband with its FiOS service. After AT&T’s (NYSE:T) recent missteps with significant acquisitions, a dividend cut, and change in strategic direction, Verizon is arguably the better dividend stock to own. The company focuses on providing wireless and broadband services. Furthermore, the dividend yield is high at about 4.9%, and the stock is a Dividend Contender. The stock is trading at a very reasonable valuation of approximately 9.6X. I view Verizon as a long-term buy.

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Overview of Verizon

Verizon is one of the two market leaders in the US wireless market. The company has about 120 million connections, including 91 million postpaid and four million prepaid mobile phone customers and around 25 million data devices. The telecom giant recently acquired Tracfone, a reseller, adding ~20 million prepaid phone customers. In addition, Verizon serves the broadband market with about 13.1 million FiOS connections. The company also has roughly 25 million fixed-line telecom connections. Verizon recently divested its media assets, including Yahoo, AOL, TechCrunch, and Engadget, for $5 billion in 2021. Verizon took on its name in 2000, and from 1984 to 2000, it was known as Bell Atlantic. Before 1984, the company was part of AT&T.

Total revenue was $133,613 million in 2021 and the past 12 months. Verizon has a market capitalization of ~$220.34 billion.

Selected Data for Verizon (NYSE)

Ticker VZ
Market Cap $220.34 billion
Stock Price $52.49
Dividend (FWD) $2.56
Dividend Yield 4.88%
P/E Ratio (FWD) 9.6

Source: Data from Portfolio Insight (as of March 17, 2022)

Verizon’s Dividend and Dividend Safety

Verizon is well-known as an income stock but also a dividend growth stock. The company has raised the dividend for 18 years, making the company a Dividend Contender. Verizon and its predecessor company have paid a dividend since 1984.

The forward dividend rate is $2.56 per share, giving a forward dividend yield of ~4.88%. This value is more than the 5-year average of 4.49%. In addition, the dividend yield is more than three times the average of the S&P 500 Index. The high dividend yield placed the stock on the Dogs of the Dow in 2022.

The company last announced a quarterly dividend increase of 2% to $0.64 per share from $0.6275 per share on September 2, 2021. However, Verizon’s dividend growth rates are low at approximately 2.11% in the trailing 5-years and 2.54% in the past decade. According to the Chowder Rule, this gives a Chowder Number (CDN) of 6.97%.

In addition, Verizon has solid dividend safety metrics from the perspective of earnings, free cash flow (FCF), and the balance sheet.

From an earnings perspective, the payout ratio was approximately 47% based on an annual dividend of $2.5225 per share and diluted non-GAAP earnings per share of $5.39. My target percentage for payout ratio is 65% suggesting Verizon’s dividend is safe, especially considering the low expected dividend growth rate. It is unlikely Verizon will increase the dividend growth rate beyond the trailing average.

The dividend is also safe from the standpoint of free cash flow. In the LTM, free cash flow was about $39,539 million. The dividend required $10,445 million, giving a dividend-to-FCF ratio of roughly 26.4%. This percentage is well below my threshold percentage of 70%, indicating a safe dividend.

The wireless and broadband business is capital intensive. Hence, Verizon has a significant amount of debt on its balance sheet. At the end of Q4 2021, the company had ~$2,921 million in cash, cash equivalents, short-term investments, and trading securities. There was $7,346 in current long-term debt, and long-term debt was $143,209 million. However, debt is not a risk for the dividend with the leverage ratio at 3.5X and interest coverage more than 8.3X supported by high FCF.

Furthermore, Verizon has a lower medium investment grade rating of BBB+ / Baa1.

Competitive Advantage, Risks, and Valuation

One of Verizon’s competitive advantages is its scale. This fact translates to cost advantages and operating efficiencies. In addition, Verizon’s scale allows it to invest in its networks and bid for spectrum. Furthermore, the wireless and broadband markets are capital intensive, implying the number of viable competitors is small. In fact, AT&T, T-Mobile (TMUS), and Verizon together control more than 90% of the wireless market, forming an oligopoly.

A second primary advantage is Verizon’s geographic coverage and perception of quality. Customers want as much coverage as possible without losing the signal. Additionally, they want quality for both voice and data transmission. Because of quality perception, Verizon tends to have incremental net additions each quarter and a low churn rate. In addition, the proliferation of more networked devices on wireless networks by business and retail customers will drive growth.

However, the wireless and broadband markets are competitive. Besides AT&T and T-Mobile, the cable companies are trying to compete in wireless with Wi-Fi networks, albeit at a limited scale. They are, however, strong competitors in broadband. Therefore, Verizon must continuously invest in technology or risk falling behind its competitors. Furthermore, the wireless spectrum is subject to federal government regulation.

Verizon is undervalued based on historical valuation metrics. At the current stock price, Verizon trades at a forward price-to-earnings (P/E) ratio of about 9.6X. The multiple in the past decade has ranged from roughly 12X to 15X, suggesting Verizon is undervalued. In addition, the dividend yield is higher than the trailing 5-year average implying the stock is undervalued based on this metric.

Verizon’s main competitor, AT&T, cut its dividend and must regain focus. Hence, in the head-to-head matchup between Verizon and AT&T, Verizon comes out ahead. The combination of market leadership in wireless and broadband, focus, a growing dividend, dividend safety, and undervaluation makes Verizon a long-term buy, in my opinion.


Disclosure: None.

About the Author

Dividend Power is a self-taught investor and blogger on dividend growth stocks and financial independence. Some of his writings can be found on Seeking Alpha, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, Entrepreneur, FXMag, and leading financial blogs. He also works as a part-time freelance equity analyst with a leading newsletter on dividend stocks. He was recently in the top 1.2% (98 out of over 8,252) of financial bloggers as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

Disclaimer: The author is not a licensed or registered investment adviser or broker/dealer. He is not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.

Updated on Mar 18, 2022, 4:40 pm

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