What are others saying about Verizon?
On SimplyWall.st, they calculated that the present value of the next five years of levered FCF discounted at 8.49% was $75,230 million and the present terminal value with a growth rate of 2.47% was $233,353, which comes to a total valuation of $308,584 million. Divide that value by 4,079 million shares outstanding and you get $75.65 per share. According to SimplyWall.st, Verizon has over a 35% discount to the current market price.
I posted before my recent valuation of Verizon here.
How is Verizon’s financial performance?
Not only is Verizon undervalued through a simple discounted cash flow analysis, but the company has had healthy returns on equity (ROE) of 68%, return on assets (ROA) of 14% and return on capital (ROC) of 9%.
Should you buy Verizon because of the dividend?
The dividend yield is around 4.9% and the payout ratio around 60%, so Verizon will most likely continue to pay a dividend at current levels even if there is a near term recession. If you are buying for a long-term position, then it would make an ideal addition to any dividend portfolio. However, many investors are worried about rising interest rates. When interest rates go up, bond prices and high dividend earning stocks go down. This effect is more apparent for REIT’s and utility stock, but telecommunication stocks are different.
Like Verizon, the telecommunication stocks have very attractive valuations compared to REIT’s and utilities, which most sell for a premium. Not only do telecommunication stocks look cheaper than most high dividend stocks, they also tend have the highest dividend yields.
Will interest rates continue to go up?
Interest rates may continue to go up, but it is my belief that they will rise more gradual and we will experience the rapid rise as of late. If the interest rates continue rise rapidly, then I would expect a near term recession. However, the FED is aware of the risks and is most likely going to raise rates a lot less than what the bond and equity markets have priced in for this year. Markets are probably expecting four rate increases, when one or two is more likely.
Is Verizon a safe investment?
Even if there was a recession, it is unlikely that people will stop using their cell phones regardless of the economic conditions. No investment is completely safe. Verizon from a valuation point of view is less risky than most growth stocks and other high dividend alternatives.
If a recession is upon us, Verizon might be a better alternative to weather the storm. In 2008, Verizon was down 25.6%, whereas the Dow Jones Index was down 36.3%, S&P 500 index was down 41.0% and NASDAQ index was down 52.6%.
Disclaimer: I own Verizon stock.