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 can not be calculated. When also considering the NPV MMA Differential, the stock is trading at a 49.3% premium to its calculated fair value of $37.82. 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 3.) above. VZ earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1984 and has increased its dividend payments for 17 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 $722 is below the $1,800 target I look for in a stock that has increased dividends as long as VZ has. The stock's current yield of 4.45% exceeds the 2.74% estimated 20-year average MMA rate.
Peers: The company’s peer group includes: AT&T Inc. (T) with a 7.4% yield and Lumen Technologies, Inc. (LUMN) with a 7.8% 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 $38.61 before VZ's NPV MMA Differential increased to the $1,800 minimum that I look for in a stock with 17 years of consecutive dividend increases. At that price the stock would yield 6.5%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,800 NPV MMA Differential, the calculated rate is 5.5%. This dividend growth rate is higher than the 1.6% used in this analysis, thus providing no margin of safety. VZ has a risk rating of 2.00 which classifies it as a Medium risk stock.
For many years VZ has enjoyed a dominant market share despite premium pricing compared to its major rivals. The company has felt pressure as its competitors begin to compete more on price. The company enjoys 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 $37.82. Its valuation keeps me from adding to my position at this time.
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. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in VZ (0.4% of my Dividend Growth Stocks Portfolio) in my Dividend Growth Portfolio.
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