Will Verizon Communications Surprise Again?

  • Verizon stock is an excellent candidate for diversified, large-cap dividend stock portfolios.
  • Verizon is well positioned for continued growth.
  • Verizon's recent decision to purchase XO Communications’ fiber-optic network business will help it to maintain network superiority.

In my view, Verizon Communications Inc. (NYSE:VZ) is well positioned for continued growth. The company remains committed to consistently investing in its networks for the future. Its 2015 investments have positioned it for growth and allow it to maintain its network leadership position. What's more, to maintain network superiority, Verizon announced on February 22, that it has signed an agreement to purchase XO Communications’ fiber-optic network business for approximately $1.8 billion. According to Verizon, its ownership of XO’s fiber-based IP (Internet Protocol) and Ethernet networks will help to better serve enterprise and wholesale customers. Also, acquired fiber facilities will help Verizon continue to densify its cell network. The transaction is subject to customary regulatory approvals and is expected to close in the first half of 2017. Verizon expects to receive several financial benefits from the deal, including a step-up by the assets as well as operating and capital expense savings. The net present value of the operational synergies is expected to be more than $1.5 billion.

Verizon wireless segment accounted for 69.7% of the company revenue in 2015, and the total wireless revenue grew 4.6% year-over-year. However, what is most encouraging, in my opinion, is the margin expansion. Segment EBITDA margin increased to 38.4% in the last quarter from 32.6% in the same quarter a year ago. For the full year 2015, wireless EBITDA margin was at 42.5% compared to 40.2% in the previous year. In my view, the strength and the leading position of Verizon's wireless business can be deduced from its behavior against the competition. Despite increased competition from T-Mobile US (NASDAQ:TMUS) and extreme discounts from Sprint (NYSE:S), Verizon has repeatedly emphasized that it is looking for profitable subscriber growth rather than trying to follow T-Mobile and Sprint's rate-cut offers. That can be seen in the company's operating metrics. Verizon added 1.5 million net postpaid subscribers in the fourth quarter of 2015, of which 449,000 were postpaid phone net adds.

As I see it, Verizon Communications stock is an excellent candidate for diversified, large-cap dividend stock portfolios. The company is generating strong free cash flow, and the dividend yield is high at 4.33%. In September 2015,  Verizon's board approved a 2.7% increase in dividend which raised its annualized dividend to $2.26 per share. This was the ninth consecutive year that its board approved a dividend increase, affirming their confidence in the strength of their future cash flows. The company's free cash flow in 2015 was at $21.2 billion while its paid dividends were at $8.5 billion, putting the full year free cash flow payout ratio at 40%.

Verizon is scheduled to report its first-quarter 2016 financial results on Thursday, April 21, before market open. According to 26 analysts' average estimate, Verizon is expected to post a profit of $1.05 a share, a 3% rise from its actual earnings for the same quarter a year ago. The highest estimate is for a profit of $1.15 a share while the lowest is for a profit of $0.93 a share. Revenue for the first quarter is expected to increase 1.9% year-over-year to $32.58 billion, according to 22 analysts' average estimate. There was one upward revision during the last seven days and three upward revisions of EPS during the past 30 days. Since Verizon has shown earnings per share surprise in its last four quarters, as shown in the table below, there is a good chance that the company will beat estimates also in the first quarter.

Data: Yahoo Finance

Since the beginning of the year, VZ's stock is up 12.9% while the S&P 500 Index has increased 0.2%, and the Nasdaq Composite Index has lost 3.1%. However, since the beginning of 2012, VZ's stock has gained only 30.1%. In this period, the S&P 500 Index has increased 62.8%, and the Nasdaq Composite Index has risen 86.2%.

VZ stock chart

Source: Verizon stock price chart by amigobulls.com

Valuation

Verizon's valuation is good. The trailing P/E is very low at 11.94, and the forward P/E is also low at 12.85. Furthermore, the Enterprise Value/EBITDA ratio is also very low at 6.63.

In addition, most of VZ's Margins, Growth Rates and Efficiency parameters have been much better than its industry median, its sector median and the S&P 500 median as shown in the tables below.

Source: Portfolio123

Conclusion

Verizon is scheduled to report its first-quarter 2016 financial results on Thursday, April 21, before market open. According to 26 analysts' average estimate, Verizon is expected to post a profit of $1.05 a share, a 3% rise from its actual earnings for the same quarter a year ago. Since the company has shown earnings per share surprise in its last four quarters, there is a good chance that it will beat estimates also in the first quarter. Verizon is well positioned for continued growth. The company remains committed to consistently investing in its networks for the future. In my view, the company's recent decision to purchase XO Communications’ fiber-optic network business will help it to maintain network superiority. As I see it, Verizon's stock should be included in every diversified large cap dividend stocks portfolio. The company is generating strong free cash flow, and the dividend yield is high at 4.33%.

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