Can Investors Hear Verizon Now

By Ryan Guenette - September 7, 2012 | Tickers: T, S, TMUS, USM, VZ | 0 Comments

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In this volatile economic market, investors are in search of steady and sustainable companies that offer steadfast income. The European Union is anticipated by many to be on the cliff of destruction. The United States economy is recovering, yet at a pace well south of what was previously expected. China is now realizing their growth rate is unsustainable, and is preparing for a “soft landing.” Ben Bernanke may now be strongly considering further federal intervention to stimulate the economy. Overall, the economic picture is deteriorating, which has driven millions into the relative safety of Verizon Communications Incorporated (NYSE: VZ).

The company is a provider of communications, information, and entertainment products and services to consumers, businesses of all sizes, and certain governmental agencies. Verizon employs 194,000, and is valued at $121.85 billion on the New York Stock Exchange. Over the past year, the company has rallied 19.60%, stepping with the S&P 500, which has rallied 18.92% during this same time period. So can investors hear Verizon now, or is the company traveling under a tunnel?

Long-Term Resolve & Massive Dividend

In 2002, Verizon Communications reported earnings per share of $1.49. In 2012, the average analyst consensus believes the company will derive $2.49 per share from its business operations. This represents a 67.11% increase in earnings over the course of a decade. Based on these statistics, Verizon’s compound annual growth rate (CAGR) is 5.27%, a sustainable yet decently paced growth rate that should continue into the future. Additionally, Verizon pays out a dividend that has drawn investors to Verizon’s stock like bees to honey. Currently, Verizon pays out quarterly dividends of $0.50, or an annual dividend of $2.00, which at the current price, puts the dividend as yielding 4.64%. This is up from 2011’s annual dividend of $1.96, and is further anticipated to expand into the future. By 2014, the street projects Verizon’s annual dividend to reach $2.12. Verizon’s massive dividend acts a security cushion for investors in downturns, as at a certain point the dividend becomes to compelling for most investors. From this we can see Verizon’s financial stability, annualized single digit annualized growth rate, and incredibly large dividend.

The chart below displays Verizon Communication’s sales, operating profit, net income, net margin, operating margin, earnings per share, dividend, and rate of dividend (the percentage of net income that is paid out in the dividend) over the coming years.

Shifting Focus

Billions of people utilize wireless phones every day. It doesn’t matter if they are Apple iPhones, Google Droids, or any number of the other brands on the market; they all have one thing in common. Their users are paying large sums of money to telecommunications companies. Plans offer unlimited talk, text, and data, but at a steep price. Verizon and other telecommunication companies have shifted their focus from fixed telephone lines, to wireless subscribers. As the chart below, the growth that has been seen in wireless subscribers is wildly superior to that seen in fixed telephone lines.

To take advantage of this monumental shift to mobile, Verizon will have to remain competitive in this sector. They will have to track competition, and react to any moves they make, while keeping its margins stable. If able to continue to expand and maintain its customer base, the company will be able continue to pay out its large dividend. Verizon views it customers as an investment, as if they are able to sustain their relationship, the customer will become a gold mine, paying dividends monthly. This gives Verizon’s business model incredible predictability and sustainability, allowing the company to constantly raise dividends. The chart below displays Verizon’s dividend over the past two decades.

All in all, Verizon should benefit from the explosive growth that is being seen in wireless subscribers, and has a stable and consistent business model that has allowed the company to increase its dividend payouts.

Industry Trailblazer

Compared to some of Verizon’s most prominent competitors, such as: AT&T Incorporated (NYSE: T), United States Cellular Corporation (NYSE: USM), Sprint Nextel Corporation (NYSE: S), and MetroPCS Communications Incorporated (NYSE: TMUS), Verizon compares relatively in-line.

In terms of growth, Verizon is the industry leader, while United States Cellular is the industry laggard. AT&T and Verizon are the only companies in the industry that pay out dividends, with AT&T possessing the largest dividend, and with Verizon possessing the fastest growing dividend. In the fundamental ratio comparison, AT&T is trading at a premium to its peers, while MetroPCS is the industry bargain. The same is true when growth is taken into account. In the net profit margin comparison, Sprint stands out the downside, while MetroPCS stands out to the upside.

The Foolish Bottom Line

In this extremely volatile economic market, it is comforting to know that inside your portfolio sits one of the most stable and reliable companies in the world. Verizon possesses a dividend over 4%, which it has increased constantly over the past years. The company’s fundamentals are strong, and its business model has proven itself constantly over the past years. Compared to its peers, Verizon stacks up relatively favorably. While there are some concerns that this investment has become too crowded and that Verizon’s price to earnings multiple is too high, the company is a staple of consistency and stableness, and is a stock investors can hear now.       

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