Verizon: A Bull/Bear Tug-Of-War Between Dividends and Debt
Staying true to trend this week, the third company that we’re looking at, Verizon (VZ) is down on a year-to-date basis. This is interesting, because it wasn’t all that long ago that the stocks targeted by the Nobias algorithm for outsized analyst activity were largely the high flying growth stocks with nosebleed valuations. We’ve witnessed a rotation in the market, from growth to value, throughout recent months and it appears that analysts are making that same transition with their coverage. So, with that in mind, let’s take a look at Verizon, a leader in the telecommunications space, largely known for its slow, yet steady growth, and high dividend yield.
VZ shares are down 2.5% year-to-date. Over the trailing 12 months, VZ shares are down 0.5%. During these same two periods of time, the S&P 500 has posted gains of 11.46% and 49.33%, respectively. Without a doubt, VZ has been a laggard. Is this stock a buy after losing so much ground to the major averages over the last year or so? Let’s find out what reputable analysts are saying.
Eric Volkman, a 4-star Nobias analyst who writes for Nasdaq.com recently penned a piece highlighting the company’s first quarter earnings, which were released on Wednesday, April 21, 2021. Volkman began his piece, highlighting the fact that VZ beat analyst expectations on both the top and bottom lines. He said, “For its first quarter of fiscal 2021, the telecom giant managed to increase its revenue by 4% year over year to $32.9 billion. Generally accepted accounting principles (GAAP) net income also headed north, advancing by 25% to $5.38 billion. On a non-GAAP (adjusted) basis, the bottom line profit was $1.31 per share, up from the year-ago quarter's $1.26.”
For the quarter, analysts were expecting $32.47 billion in revenues and adjusted net profits of $1.29/share. Volkman continued, noting that VZ separates its business into three segments: “consumer, business, and media.” He said, “The largest by far -- consumer -- enjoyed nearly 5% growth to $22.8 billion, which the company said was due largely to new phone activations.” Volkman points out that VZ’s business segment posted relatively flat results for the quarter, with sales up just 1%.
VZ’s media segment posted the best growth during Q1, up 10%. However, as Volkman notes, this is the smallest piece of Verizon’s overall business, accounting for just $1.9 billion of the company’s $32.9 billion sales during the quarter. Volkman concluded his analysis, highlighting the forward guidance provided by Verizon during the quarter. He said that Verizon “Believes it will post an adjusted, per-share net profit of $5.00 to $5.15, with service and other revenue growth coming in at 2%. Currently in the midst of rolling out its 5G network, Verizon anticipates its capital spending will total $19.5 billion to $21.5 billion for the year.”
David Van Knapp, another 4-star Nobias analyst who writes for Daily Trade Alert, touched upon these slow growth expectations in an article he recently published, focused around his recent purchase of Verizon shares. Van Knapp says, “Verizon is a high-yield, slow-growth DG [dividend growth] stock. It increases its dividend at only about 2% per year. Some investors would find that unacceptable, but it’s OK with me for a stock yielding >4%. I wouldn’t accept it for, say, a 1%-yielder.” Van Knapp noted that his fair value estimate for VZ shares is $62, meaning that he believes “Verizon is 7% undervalued right now, meaning that its price is, at worst, a fair deal.” He noted that this company might not be appealing to many investors because of its relatively slow growth and slow dividend growth; however, he concludes his article saying, “This purchase is an example of opportunistically investing in excellent companies at attractive prices when they are available. As the entire market is widely considered overvalued, it’s great to find a high-quality company available for a fair price.”
Van Knapp’s fair value estimate is essentially in-line with the consensus fair value estimate by analysts tracked by TipRanks, according to a recent article published by Austin Angelo, a 5-star Nobias analyst writing for analystratings.com. Angelo not only says that the TipRanks consensus is $61.89, but also that J.P. Morgan recently released a note on Verizon, which placed a “buy” rating on the stock with a $64/share fair value estimate. Being that VZ currently trades for $57.30, it appears that shares have upside potential. When reading through these bullish analyst reports, it’s clear that investors view VZ as an income oriented stock. Bullish investors clearly focus on the company’s dividend yield and Verizon’s long history of rewarding shareholders with annual dividend growth.
David Trainer, a 5-star Nobias analyst who writes for Forbes.com, recently published an article titled “Verizon’s Cash Flow Increases The Safety Of Its Dividend Yield”. In his piece, Trainer notes that Verizon “is the featured stock in March’s Safest Dividend Yields Model Portfolio.” Like so many other Verizon bulls, Trainer is willing to take a step back and acknowledge long-term trends when looking at VZ shares, rather than focus too much on the stock’s short-term growth potential.
Both Trainer and Van Knapp discussed the power of compounding when it comes to buying and holding shares of a blue chip dividend growth stock like Verizon. In his piece, Trainer highlighted the company’s long-term profitability metrics, saying, “Verizon has grown revenue by 4% compounded annually and net operating profit after tax (NOPAT) by 5% compounded annually over the past two decades. Verizon’s NOPAT margin increased from 15% in 2016 to 20% in 2020 while its return on invested capital (ROIC) improved from 6% to 8% over the past decade.” Because of this reliable bottom-line growth, Verizon has been able to generate reliable dividend growth as well. Train says, “Verizon has increased its dividend for 14 consecutive years. More recently, the firm increased its dividend payments from $2.29/share in 2016 to $2.49/share in 2020, or 2% compounded annually. The current quarterly dividend, when annualized provides a 4.5% dividend yield.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Yet, this income oriented focus by management hasn’t come at the cost of capital expenditures (wire-line and wireless networks are very expensive to build and maintain) or making mergers and acquisitions in an attempt to grow sales. Trainer highlights the fact that VZ’s FCF has outpaced its dividend payments over the long-term, saying, “Since 2015, Verizon’s cumulative FCF easily covers it annual dividend payments even after the $3.4 billion spent to acquire Fleetmatics and Telogis in 2016 as well as the $6.4 billion spent to acquire Yahoo, XO Communications.’ fiber business, and fiber optic network assets from WideOpenWest in 2017. Over the past five years, Verizon generated $63.2 billion (27% of current market cap) in FCF while paying $48.8 billion in dividends.”
The major issue that bears have when it comes to VZ stock isn’t the company’s dividend, its business, or its brand name...but instead, the company’s balance sheet. Earlier in 2021, Verizon led all bidders at the FCC spectrum auction, spending more than $45 billion. It appears that the company had to make such a large move to maintain its leadership in the wireless space as competitors launch impressive 5G coverage; however, this heavy spending came at a cost.
Verizon recently surpassed its rival, AT&T (T) as the largest non-financial issuer of debt. During its recent Q1 report, management said, “Verizon's unsecured debt balance increased year over year by $42.9 billion to $147.6 billion in first-quarter 2021, and the company’s net unsecured debt (non-GAAP) increased by $39.7 billion year over year to $137.4 billion.” During the Q1 earnings conference call, Verizon’s CFO, Matthew Ellis, said, “Based on our current cash flow assumptions, we expect our net leverage ratio to be approximately 2.8 times by the end of the year. We will evaluate the level of our cash balance based on the recovery in the economy and developments with the pandemic.”
Although it’s true that Verizon’s cash flows are large, the company’s debt load/net debt ratios are high enough to scare away conservative investors. This is likely to be the story that surrounds VZ shares for years as management attempts to repair the damage that was done to its balance sheet during the recent FCC auction.
Disclosure: Nicholas Ward is long shares of VZ and T. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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