Verizon Communications Inc. (VZ)

Equity
US
Communication Services

RISK

RETURN

Key risk factors

Negligible price volatility

Strong trading liquidity

Strong & resilient to price shocks

Key return factors

Excellent dividends

Slightly undervalued vs peers

Somewhat favourable analyst view

Company profileVerizon Communications Inc., through its subsidiaries, offers communications, technology, information, and entertainment products and services to consumers, businesses, and governmental entities worldwide. Its Consumer segment provides postpaid and prepaid service plans; internet access on notebook computers and tablets; wireless equipment, including smartphones and other handsets; and wireless-enabled internet devices, such as tablets, and other wireless-enabled connected devices comprising smart watches. It also provides residential fixed connectivity solutions, such as internet, video, and voice services; and sells network access to mobile virtual network operators. As of December 31, 2021, it had approximately 115 million wireless retail connections, 7 million wireline broadband connections, and 4 million Fios video connections. The company's Business segment provides network connectivity products, including private networking, private cloud connectivity, virtual and software defined networking, and internet access services; and internet protocol-based voice and video services, unified communications and collaboration tools, and customer contact center solutions. This segment also offers a suite of management and data security services; domestic and global voice and data solutions, such as voice calling, messaging services, conferencing, contact center solutions, and private line and data access networks; customer premises equipment; installation, maintenance, and site services; and Internet of Things products and services. As of December 31, 2021, it had approximately 27 million wireless retail postpaid connections and 477 thousand wireline broadband connections. The company was formerly known as Bell Atlantic Corporation and changed its name to Verizon Communications Inc. in June 2000. Verizon Communications Inc. was incorporated in 1983 and is headquartered in New York, New York.

Valuation: Slightly undervalued

Multiple

TTM

NTM

P/E

14.70

8.80

PEG

33.50

P/B

1.80

1.40

P/S

1.20

P/FCF

8.90

9.40

EV/EBITDA

7.20

From both historical and forecast perspectives, the stock is moderately underpriced compared to similar stocks. In particular, the stock is reasonably priced on P/E, of fair value on EV/EBITDA, and trading at neutral levels on P/FCF.

Performance: Mixed

Over the last six months, the stock performance has varied, with an increase following a drop. The stock's price trend wasn't definitive when matched against its global counterparts from the same sector and industry (as depicted above). Over the past six months the stock has exceeded the performance of this peer group by 3ppts and its growth decelerated by 3ppts in the past month. This is equally valid for peers from the same country and industry. Given the stock's valuation versus its peers, its total price movement is neither favourable nor unfavourable.

Analyst view: Somewhat favourable

The average target price is 47 and suggests 20% upside potential. Usually, this means a BUY recommendation among investment firms, or a recommendation to increase one's position in this instrument in the next 12 months. The most optimistic analyst has a target price of 55.0. This translates into 39% upside potential in the best case. On the other hand, the most pessimistic analyst has a target price of 34.0. This is equivalent to 14% downside potential in the worst case.

Profitability: Good

RoE

Verizon Communications Inc. reported a return on equity (RoE) of 12.1% in the last 12 months, down from 12.7% in FY23. The market consensus projects an RoE of 21.4% in FY24, this time above its peers.

RoA

Another important profitability metric, return on assets (RoA), amounted to 3.0% in the last 12 months, a decrease from 3.1% in FY23. The market analysts predict that RoA will be 5.3% in FY24, more robust than its peers in this period.

RoCE

In the last 12 months, the return on capital employed (RoCE) declined to 3.5%, below the peers. The consensus estimate for FY24 for RoCE is 15.6%, however, this time ahead of the peers.

Net margin

EBITDA margin

Historically, VZ has reported good net margins compared to its global peers. Specifically, in the last 12 months, this metric equalled 8.4%, down from 8.7% in FY23. The company has reported strong EBITDA margins compared to its global peers in recent years. EBITDA margin amounted to 35.0% in the last 12 months, up from 34.9% in FY23.

RoIC / WACC = 1.6(good value creation)

The ratio of return on invested capital (RoIC) to the weighted average cost of capital (WACC) has been 1.6 in the past several years. This ratio implies a good shareholder value creation.

Growth: Poor

Revenue

EBITDA

EPS

Free cash flow

VZ reported revenue of USD 134 043mn in the last 12 months, up 0% from FY23. At the same time, the dynamics of cash flow, as measured by free cash flow (FCF), were drastically different. EPS fell 3% from FY23 to USD 2.68. Market expects EPS to reach USD 4.59 in FY24.Revenue has been growing very slowly over the past several years (middle negative), while slow revenue growth and a stable cost base have translated into weak EBITDA growth (negative-to-neutral). Net income has fallen rapidly in recent years (strongly negative). FCF has fallen rapidly, far faster than EBITDA. We emphasize the highly volatile dynamics of FCF. On the positive side, revenue and EBITDA dynamics is very stable.

Dividends: Excellent

Dividend paid

Dividend yield

The company has a track record of regular dividend payments. It has paid dividends in each of the past ten years. Dividend per share (DPS) has grown yearly, and there is an evident trend. In the past 12 months, the dividend yield has been outstanding and can be rated excellent compared to its peers. At the same time, the average five-year yield has been significantly higher and exceeded nearly all its peers. On average, the company pays dividends quarterly, which may appeal to investors valuing a regular income stream.

Default risk: Moderate

The risk of default is moderate. We note robust profitability and solid return on capital, among the positive credit factors. Among the negative credit factors, we point to slow historical revenue growth, excessive margin volatility, and an unfavourable capital structure.

Volatility: Negligible

In normal market circumstances, VZ is not volatile. Put differently, without outstanding market volatility or shocking company news, the stock's price will stay within a narrow range. The stock's losses on its worst days (less than 1-5% of the time) will range from very low to negligible.

Stress-test: Negligible

In highly turbulent market conditions, VZ is not volatile. In other words, the stock will fall far less than the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be very low.

Selling difficulty: Very low

VZ boasts very high trading liquidity. The average private investor can sell his common position in the stock immediately. Liquidity is usually very stable and remains favourable on the days with the lowest activity. The trading volume mostly stays the same even under highly turbulent market conditions.

Country risk: Very low

The institutional, legal, and compliance risks associated with the company's country are minimal. In combination with stringent business standards, shareholder rights are very highly protected.

Other risks: Negligible

No other major risks have been identified.