Case Study: Verizon (VZ) stock according to high performing analysts
Key Points
Performance
VZ shares fell by 0.85% this week, pushing their year-to-date losses down to -13.81%. This compares poorly to the S&P 500, which is up by 11.98% on a year-to-date basis.
Event & Impact
This week, rumors began to swirl that Amazon is interested in potentially disrupting the consumer wireless business by providing cellular services to Amazon Prime members. Oftentimes, when Amazon enters a new industry, it quickly becomes the 800-pound gorilla that its peers have to contend with. This caused a sell-off in the telecommunications space on Friday.
Noteworthy News:
Despite the Amazon headwinds, Verizon shares appear to be historically cheap at current levels, trading with a single digit price-to-earnings ratio that represents a roughly 50% discount to their historical averages. Furthermore, Verizon shares provide investors with a 7.31% dividend yield after their recent sell-off.
Nobias Insights
57% of recent articles published by credible authors focused on VZ shares offer a “bullish” bias. Both of the two credible Wall Street analysts who cover Verizon believe that shares are likely to rise in value. The average price target being applied to VZ by these credible analysts is $47.50, which implies an upside potential of approximately 37.4% relative to the stock’s current share price of $34.58.
Bullish Take A recent analyst note from Nobias 5-star rated analyst, Simon Flattery, stated, “Morgan Stanley analyst Simon Flannery upgraded Verizon Communications to Overweight from Equal Weight with a price target of $44, up from $41, which offers over 20% total returns. Following the stock's significant underperformance in 2022, Verizon trades at a "historically attractive valuation on an absolute and relative basis," Flannery tells investors in a research note.”
Bearish Take Reinhardt Krause, a Nobias 5-star rated author, stated, “Telecom stocks tumbled Friday on renewed reports that e-commerce giant Amazon.com plans to resell mobile phone services in the U.S. through its Prime loyalty program.”
VZ May 2023
On Friday the U.S. stock market rallied in a major way in response to the debt ceiling bill being passed by the Senate, signaling that an unprecedented debt default was no longer a threat to the U.S. economy.
The S&P 500 rose by 1.45% on Friday. The Dow Jones Industrial Average was up by 2.12%. And the tech-heavy Nasdaq was up by 1.07%. In other words, this was a broad based rally; however, two notable exceptions were the major U.S. wireless companies, AT&T (T) and Verizon (VZ).
During Friday’s trading session AT&T shares fell by 3.80% and Verizon dipped by 3.19%.This was in response to headlines that popped up regarding news that Amazon (AMZN) could be a competitive threat to the U.S. wireless companies in the future.
Bearish Nobias Credible Analysts’ Opinions:
Reinhardt Krause, a Nobias 5-star rated author, covered this news in a report published at Investors.com on Friday. Krause wrote, “Telecom stocks tumbled Friday on renewed reports that e-commerce giant Amazon.com plans to resell mobile phone services in the U.S. through its Prime loyalty program.”
“Dish Network surged and Amazon stock ended the day higher,” he added. “Reports that Amazon could partner with satellite TV broadcaster Dish surfaced a week ago,” Krause said. “Those reports said Dish would sell its prepaid Boost Mobile wireless plans through Amazon. Dish is a newcomer to the wireless phone market.”
However, right now, sources tell Krause that these headlines are more rumor than fact. “In an email to Investor's Business Daily,” he wrote, “an Amazon spokesperson said: "We are always exploring adding even more benefits for Prime members, but don't have plans to add wireless at this time."’
“Meanwhile,” Krause said, “Verizon spokesperson Rich Young in an email said nothing is going on.” He went on to quote Young, who said: "Verizon is not in negotiations with Amazon regarding the resale of the nation's best and most reliable wireless network. Our company is always open to new and potential opportunities, but we have nothing to report at this time."
Krause also noted that AT&T denied any immediate plans. Lastly, Krause highlighted an analyst note that UBS’s John Hodulik provided to clients this week.
According to Krause, Hodulik stated, "We believe such a distribution agreement could help DISH drive subscribers but it is unlikely to drive a meaningful shift in industry competition absent attractive handset promotions. We believe a bigger risk for the industry would be Amazon selling its own branded wireless service."
Bullish Nobias Credible Analysts Opinions:
Yet, in spite of these headlines, the majority of credible authors and analysts that the Nobias algorithm tracks continue to express bullish sentiment towards VZ shares. Gen Alpha, a Nobias 5-star rated author, recently published a bullish article on VZ shares titled, “Verizon: Seriously Undervalued, I'm Adding More”.
The author acknowledged Verizon’s recent underperformance, stating, “The market is undoubtedly concerned about what the future holds for Verizon, given that it lost 263K net consumer wireless postpaid phone customers during the first quarter.”
However, Gen Alpha sees growth coming from other areas of Verizon’s business. “Looking ahead,” they wrote, “fixed wireless continues to present a compelling opportunity for VZ, as it seeks to take a bigger share of the broadband pie.”
Gen Alpha continued, “This is reflected by the incumbent broadband provider Comcast seeing just 5,000 net broadband customer additions during Q1, while Verizon saw 437K total net adds in the same quarter, the highest net adds in over 10 years.” But, they said, this isn’t a story about sub-par losses, but instead, rising profits and attractive valuation.
“While the aforementioned decline in postpaid wireless customers is worth monitoring, it’s important to note that overall profitability is a more important metric,” Gen Alpha wrote. Regarding those bottom-line results, Gen Alpha stated, “Verizon’s results on the profitability front were better, as it grew wireless service revenue by 3% YoY to $11.9 billion during Q1 and grew adjusted EBITDA by $1.5 billion over the prior year period to $8.3 billion.” And, they continued, this bottom-line success is trickling down to shareholders in the form on a high dividend yield.
“Importantly for income investors, VZ now sports one of its highest yields in its history, as shown below,” wrote Gen Alpha. “The 7.2% dividend yield is well-covered by a 52% payout ratio and comes with 18 years of consecutive growth,” they continued. Furthermore, regarding the strength of VZ’s dividend, Gen Alpha said: “This yield is convenient because of the Rule of 72, which is a great way of calculating when your money will double. Based on this calculation, investors could double their capital every 10 years (72 divided by 7.2), even if Verizon doesn’t grow its dividend over the long-term, which I don’t believe will be the case.”
Looking at dividend safety, the author points out that Verizon maintains an investment grade rated balance sheet, stating, “Meanwhile, VZ maintains a BBB+ credit rating, and its net unsecured debt to adjusted EBITDA ratio stands at a reasonable 2.7x, down 0.1x from the prior year period.”
“Lastly,” the author says, “VZ appears to be in deep value territory at the current price of $36.05 with a forward PE of just 7.7, sitting far below its normal PE of 14.3.”
Gen Alpha concluded their article highlighting their “Buy” rating on VZ shares, stating, “I'm taking the opportunity to increase my income by adding at current levels, and income investors may be well-served to take a hard look at VZ at its current deeply discounted price.”
Dividend Sensei, a Nobias 4-star rated author, also recently put a spotlight on Verizon’s sell-off and the stock’s intriguing valuation in an article published at Seeking Alpha. They wrote, “Private equity is paying 11X for companies right now, meaning Verizon is dirt cheap by even private equity standards.”
“In fact,” Dividend Sensei continued, “in the first ten seasons of Shark Tank, the average multiple for a deal was 7X.” Therefore, they said, “Verizon isn't just a good deal; it's a Shark Tank-level good deal that pays a relatively safe 7% yield.
“What does a 7X multiple mean? “Verizon is priced for -3% permanent growth,” Dividend Sensei stated. With that in mind, they added, “You'll make a lot of money if it grows faster than that. The dividend will be safe forever if it grows 0% or faster.”
It’s not just credible authors who have noticed Verizon’s unique value proposition. In his most recent update on Verizon shares, Nobias 5-star rated analyst, Simon Flattery, increased his price target on VZ to $44.00/share.
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.
According to the Fly on the Wall, “Morgan Stanley analyst Simon Flannery upgraded Verizon Communications (VZ) to Overweight from Equal Weight with a price target of $44, up from $41, which offers over 20% total returns. Following the stock's significant underperformance in 2022, Verizon trades at a "historically attractive valuation on an absolute and relative basis," Flannery tells investors in a research note. The analyst sees room for improved operational performance in 2023 and the company's free cash flow ramping up by 45% by 2024. He switched his preference to Verizon from AT&T [sic], a stock he downgraded this morning to Equal Weight.”
Overall bias of Nobias Credible Analysts and Bloggers:
Overall, 100% of the credible analysts who cover VZ shares believe that they’re likely to increase in value. The average price target currently being applied to VZ by these analysts is $47.50. Today, VZ shares trade for $34.58, meaning that the average credible analyst price target implies an upside potential of approximately 37.4%. Also, 57% of recent articles published on Verizon by credible authors have expressed a “bullish” bias towards shares.
Disclosure: Nicholas Ward is long VZ. Nicholas Ward wrote this article for Nobias at their request with the intention 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.
Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.
Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.