Friday, October 31, 2014

Verizon (VZ): Another High Yield Telecom for Current Income

Verizon Communications Inc. (VZ) provides communications, information, and entertainment products and services to consumers, businesses, and governmental agencies worldwide. This dividend achiever has paid dividends since 1984 and increased them for 10 years in a row.

The most recent dividend increase was in September 2013, when the Board of Directors approved a 2.90% increase in the quarterly dividend to 53 cents/share.

The company’s competitors include AT&T (T), Sprint (S) and T-Mobile (TMUS).

Over the past decade this dividend growth stock has delivered an annualized total return of 9% to its shareholders. Future returns will be dependent on growth in earnings and dividend yields obtained by shareholders.

The company has managed to deliver a 12.10% average increase in annual EPS over the past decade. This high earnings growth is deceptive, since the company's annual earnings per share fluctuates wildly due to one-time accounting effects, such as pension adjustments for example. Verizon is expected to earn $3.57 per share in 2014 and $3.87 per share in 2015. In comparison, the company earned $4/share in 2013.

Verizon is one of the two dominant telecom players in the US, the other one being AT&T. Both companies have the scale in number of customers to compete successfully, invest in their business and market their products, while keeping costs of servicing customers low and therefore generating excess cash flows. Those excess cash flows are returned to shareholders through a generous dividend. In addition, the company has the reputation for America's best coverage for wireless, which provides it with a high market share and customer loyalty. This has resulted in low churn rates, which in essence makes it easier to make money, since acquiring new customers is expensive. In addition, Verizon has valuable spectrum, which is of limited quantity in the US. The company has been able to grow through acquisitions over the past years, which is another way that it can bolster its future earnings per share. The risk to Verizon is that the already cutthroat telecom market is shaken by a price war, which could be bad for margins and profitability.

I like the fact that Verizon was able to acquire the remaining 45% of Verizon Wireless it didn't already own from Vodafone (NASDAQ:VOD) by paying $130 billion in cash and stock. Approximately 1.275 billion shares were issued, bringing number of shares outstanding from 2.874 billion at end of 2013 to 4.153 billion by the end of Q2 2014. In addition, the company took on approximately $60 billion in debt, and also offered asset stakes to Vodafone to pay up for Verizon Wireless. This deal is expected to be accretive to Verizon over time, and is helpful to have been done at a time when interest rates are so low. It would be nice if the company takes on the challenge of repurchasing those dilutive shares over the next decade.

Since I owned shares of Vodafone at the time, I also received a few shares of Verizon. For those who own Verizon, they might be optimistic about the company, after Berkshire Hathaway disclosed a stake in the telecom giant. It is unclear at this point however, whether it was Warren Buffett who initiated the purchase, or one of his two trusted money managers - Ted Weschler or Todd Combs.

The annual dividend payment has increased by 3% per year over the past decade, which is lower than the growth in EPS. My expectations for future dividend growth are for them to be close to the rate of inflation over the next two decades.

A 3% growth in distributions translates into the dividend payment doubling every twenty four years on average. If we check the dividend history, going as far back as 1990, we could see that Verizon has last managed to double dividends every 23 years on average.

In the past decade, the dividend payout ratio has been all over the place. This was of course caused by the effect of one-time items on earnings per share. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Verizon has been able to generate a decent average return on equity of 13.30% over the past decade. With the exception of a couple years where we had large one-time adjustments to earnings, this indicator has been relatively stable however. I generally like seeing a high return on equity, which is also relatively stable over time.

Currently, Verizon is attractively valued at 13.70 times forward earnings, and has a dividend yield of 4.20%. In comparison, rival AT&T is selling for 13.30 times forward earnings and yields 5.20%. Both companies have been preferred investment vehicles to retired investors, due to their above average yields. Unfortunately, the slow dividend growth can only be expected to keep pace with inflation at best. That being said, if one needs high current income today, and would not be opposed to potentially losing a small portion of purchasing power over the next decade or two, Verizon could be the type of company to buy and hold. For use of my capital however, I am reluctant to pull the trigger on the company. I believe there are other high yield companies, which offer better dividend growth in the future, which is why I would refrain from adding to Verizon or initiating a position in AT&T. On a side note, I hold Verizon as a result of my ownership of Vodafone . I plan on holding both, but would not add any additional shares. If all the rumors are true however, my Vodafone shares might turn into AT&T stock at some point in time.


  1. Grouch rant

    Your blog is so much better than Seeking Alpha, why do you require your regular readers to click through to that site? If you want exposure there, why not just post the same full piece in both places?

    End Grouch rant

    1. I understand your concerns. Thank you for the honest input.

      I wrote those articles exclusively for SA, in order to see if I can earn something from my content. SA makes those articles exclusive on their site, meaning I can only post a portion to my site. The articles have already been posted on SA, but since I am busy and cannot do more stock analyses, I am simply going to link to those I have not reviewed for a few more weeks.

      In reality, after those analysis articles that are only postable on SA, I have not done anything else exclusive. And those articles represent less than 1% of all the articles written on the site here in total. Hence, I do not think this to be such a high inconvenience for readers. Plus, many of the readers that found this site came from Seeking alpha in the first place. Although much less these days.

    2. Thanks for the feedback. I understand. From Grouchy Anon

  2. DGI, Did you see the news about the accounting scandal at ARCP? Thought you might be interested. The REIT financial are always difficult for me to digest anyway.

    Hate to say it, but I agree with Grouch Rant. SA is a little cumbersome. Your blog is better stand alone.

    1. Hi,

      I am posting an article tomorrow on the topic. Please stay tuned.

  3. DGI,

    As yet, I have my telecommunications investment in the Canadian company BCE - high yield with middle of the pack dividend growth. On my next go around (after picking through some other industries), I might branch out into a U.S. telecom such as T or VZ. I believe VZ has done very well to connect with consumers and improve their brand image over the years.

    Thanks for sharing,
    - Ryan from GRB

    1. Hi Ryan,

      I am not a very big fan of the US telecoms, although I own a token position in VZ and a tad higher one in UK's VOD. I do not like the slow growth in dividends, which are more likely to grow at rate of inflation. Of course, if I needed as much dividend income as possible today, I might reconsider this stance. But the problem I am facing is that I want to be abel to live off dividends for 40 years in the future. 3% dividend growth is not going to cut it for me..



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