Verizon Communications (NYSE: VZ)
QVI Research Report | Updated Coverage | February 2023
Summary
Verizon Communications’ value proposition presents a counterintuitive defensive play in the burgeoning 5G mobile network.
Although Verizon’s revenue growth and return on invested capital are modest, its oligopoly-leading double-digit net profit margin and return on equity are compelling.
However, Verizon’s board of directors ignores its bargain stock price for buybacks due to leverage concerns.
Despite its attractive forward yield, shares underperformed the broader market during the 2022 inflation-provoked bear, which is counter to a value investor’s reason for holding a defensive stock.
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Verizon Value Proposition
QVI Research Report’s value proposition section provides a brief synopsis of the company’s business model, major-exchange listing, stock symbol, market capitalization, and dividend-paying status. In addition, it defines the competitive advantages of a company’s products or services to its customers compared to the industry, including the stock’s historical performance vs. the sector and market.
Verizon Communications, Inc. (NYSE: VZ) is a dividend-paying large-cap stock in the integrated telecommunications industry of the communications services sector. VZ was added to the QVI Concentrated Portfolio on April 8, 2021, with a buy rating at a split and dividend-adjusted $52.54 a share.
Verizon Communications Inc., through its subsidiaries, offers communications, technology, information, and entertainment products and services to consumers, businesses, and governmental entities worldwide. Now predominated by the wireless services of its consumer segment, the company was formerly known as Bell Atlantic Corporation and changed its name to Verizon Communications, Inc. in June 2000. The company was incorporated in 1983 and is headquartered in New York, New York, USA.
QVI’s value proposition elevator pitch for Verizon:
Verizon is a counterintuitive defensive play in the burgeoning fifth-generation mobile network or 5G and the disruptive Internet of Things or IoT. Predictably, Wall Street will promote the growth stories in 5G and IoT, but QVI prefers being invested in VZ on the defensive side as we wait to see how the new technology plays out in a forever speculative and unpredictable stock market.
Performance vs. Sector and Market
The chart below illustrates VZ’s performance against the Communications Services Select Sector SPDR Fund ETF (NYSE: XLC) and the SPDR S&P 500 ETF Trust (NYSE: SPY) since QVI’s initial coverage of Verizon in April 2021.
For example, VZ has outperformed, albeit at a loss, the total return of its sector while underperforming the broader market during the coverage timeframe.
VZ Total Returns vs. XLC and SPY
Verizon Communications Inc (VZ) Total Return: -20.87%
Communication Services Sel Sect SPDR ETF (XLC) Total Return: -27.32%
SPDR S&P 500 ETF Trust (SPY) Total Return: +2.15%
Since April 8, 2021Due Diligence Resources
For a more in-depth analysis of the all-important value proposition, members should visit Verizon’s investor relations webpage and its most recent Form 10-K Annual Report submitted to the U.S. Securities and Exchange Commission or SEC.
QVI’s value proposition rating for Verizon: Bullish.
VZ Shareholder Yields
QVI Research Report’s shareholder yields section uncovers the equity bond rate of the company’s common shares. It aims to quantify the yields on earnings, free cash flow, and dividends to measure how the targeted stock compares to the prevailing yield on the 10-Year Treasury benchmark note.
Earnings and Free Cash Flow Yields
VZ’s earnings yield traded well above the floor at 12.14%, as demonstrated in the below chart. However, at 5.93%, VZ’s free cash flow yield was below the targeted threshold.
As inverse valuation multiples, the earnings and free cash flow yields suggest that VZ trades at a discount. QVI will further explore valuation multiples later in this report.
Dividend Yield
Verizon offers a generous forward dividend yield of 6.20%, supported by a moderately high 50.00% payout ratio, thus indicating a relatively safe, covered dividend with a narrow margin of safety for annual raises.
VZ yielded 4.97% from an annual payout of $2.61 on a split- and dividend-adjusted cost basis of $52.54 per share on April 8, 2018, the date of QVI’s initial stock coverage. Thus, QVI’s yield-on-cost basis was -123 basis points [bps] below the forward yield.
Average of Shareholder Yields
Quality Value Investing takes the average of the three shareholder yields to measure how the stock compares to the prevailing yield of 3.43% on the 10-Year Treasury benchmark note. For example, the average shareholder yield for VZ was 8.09% or +466 bps above the 10-Year and 7.68% or +425 bps above the Treasury yield when using the April 2018 yield-on-cost basis.
QVI’s shareholder yields rating for VZ: Bullish.
VZ Shareholder Yields
Verizon Communications Inc (VZ) Price: $41.69
Verizon Communications Inc (VZ) Earnings Yield: 12.14%
Verizon Communications Inc (VZ) Free Cash Flow Yield: 5.93%
Verizon Communications Inc (VZ) Dividend Yield: 6.20%
One-Year TrailingVerizon Fundamentals
QVI Research Report’s fundamentals section measures the performance strength of the company’s senior management by analyzing revenue growth, net profit margin, and returns on equity and invested capital.
Revenue Growth and Net Profit Margin
Per the below chart, Verizon had positive three-year annualized single-digit revenue growth of 2.41%, underperforming the 7.35% median growth for the communications services sector.
Nevertheless, Verizon had a trailing three-year double-digit net profit margin of 15.53%, nearly quadrupling the sector’s median net margin of 3.94%.
Returns on Equity and Invested Capital
Verizon’s management was producing a trailing three-year return on equity or ROE of 24.71%, above the targeted threshold and trouncing the sector’s median ROE of 5.31%.
Stock buyback programs often elevate ROE. However, Verizon’s board of directors hasn’t authorized repurchases since 2020 as it waits for its leverage ratios to hit predetermined targets. QVI will further explore debt coverage later in this report.
At 8.94%, Verizon’s three-year return on invested capital, or ROIC, is under the threshold but tops the sector’s median ROIC of 4.11%, indicating that its senior executives are adequate capital allocators.
Nonetheless, Verizon’s ROIC covers its reasonable weighted average cost of capital or WACC of 3.56%. (Source of WACC: GuruFocus).
Despite a sector-beating double-digit net profit margin and high returns on equity without share buybacks, Verizon’s management performance warrants diminished confidence in its positive, albeit modest, revenue growth and capital returns that cover costs but are below QVI’s threshold.
QVI’s fundamentals rating for Verizon: Neutral.
VZ Returns on Management
Verizon Communications Inc (VZ) Revenue Growth (YoY): 2.41%
Verizon Communications Inc (VZ) Net Profit Margin: 15.53%
Verizon Communications Inc (VZ) Return on Equity: 24.71%
Verizon Communications Inc (VZ) Return on Invested Capital: 8.94%
Three-Year TrailingNext, QVI dives into the valuation multiples, downside risks, potential catalysts, and overall investment thesis of Verizon Communications (VZ). Let’s dig further after reading the required disclosures and disclaimers.
Disclosure: I/we have a beneficial long position in the shares of VZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Substack paid subscriptions). I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: Quality Value Investing by David J. Waldron’s primary ticker research reports are for informational purposes only. The accuracy of the data cannot be guaranteed. Narrative and analytics are impersonal, i.e., not tailored to individual needs nor intended for portfolio construction beyond his family portfolio, which is presented solely for educational purposes. David is an individual investor and author, not an investment adviser. Readers should always engage in their own research or due diligence and consider (as appropriate) consulting a fee-only certified financial planner, licensed discount broker/dealer, flat fee registered investment adviser, certified public accountant, or specialized attorney before making any investment, income tax, or estate planning decisions.