In June, Verizon Communications (VZ – Free Verizon Stock Report) completed a significant acquisition with the purchase of AOL for about $4.4 billion in cash. Management stated that it intends “to provide customers with a premium digital experience based on a global multi-screen platform.” The company plans to launch a mobile-first video product this summer, which will include content such as live sports and music. It wants to provide more on-demand content, and more pay-per-view offerings. Verizon believes that the addition of AOL provides a platform to insert advertising. This is what Verizon was lacking on its own. AOL also comes with some additional content, such as Huffington Post.
This was by no means Verizon’s first major purchase. Turning to our report on the Dow component in The Value Line Investment Survey, the Blurb lists major acquisitions of MCI in 2006, Alltel in 2009, and Verizon Wireless in 2014. The Verizon Wireless deal has worked out well, but the market’s reaction to the news of the AOL transaction has been underwhelming. Since the deal was announced on May 12th, Verizon stock has underperformed the broader market averages, although not by a huge amount. The equity continues to trade in a relatively narrow range. The Price Chart shows how stable the stock has been since early 2013, a period of about 27 months. Similarly, the Ratings box shows that this is one of the least volatile stocks under our coverage, with a Price Stability index of 95 out of 100. It also shows that Verizon has a solid mark for Earnings Predictability.
There is a lot more to Verizon than its purchase of AOL. Our April 15, 2015 article on the blue chip provided a brief look at the company’s basic business. The Commentary shows that the blue chip turned in an impressive performance in the first quarter of 2015. (Note the year-to-year comparison in the Quarterly Earnings box.) Verizon’s wireless service is faring well, and growing solidly, despite vigorous competition from companies such as AT&T (T), Sprint (S), and T-Mobile (TMUS). The Array shows the profit growth we expect this year and next.
One of the most noteworthy features of this stock is its high dividend yield, as shown in the Top Label. The yield is even higher than those of most electric utility issues, and that industry is known for providing healthy dividend income. Moreover, the Array and Quarterly Dividends box show that Verizon has a track record of steady, albeit unspectacular, dividend growth over the past several years. In fact, the Commentary indicates that we expect the board of directors to raise the dividend at their meeting in the third quarter.
In addition to being attractive for income-oriented investors, this telecom stock is also appealing for conservative accounts. The Ranks box displays our top rank for Safety. The Ratings box shows the company has a Financial Strength rating of A++, which is our highest. Although the Capital Structure box shows that Verizon is highly leveraged, it also shows that, in the 12-month period that ended March 31, 2015, the company covered its interest more than seven times. Note, too, the healthy level of cash in the Current Position section. Some of this cash is being used to repurchase stock. The Array displays our estimates of a material decline in common shares outstanding from 2014 to 2015, with a smaller dropoff expected in 2016.
For the next six to 12 months, Verizon stock is only an average selection for Timeliness, as evidenced in the Ranks box. However, the Projections box shows that this issue offers attractive total return potential to 2018-2020, especially on a risk-adjusted basis. This is partly due to the fact that we project a higher valuation for the equity 3 to 5 years out. The Relative P/E Ratio shown in the Top Label is well below the market average, but the 2018-2020 projection shown in the Array is above the market average. From time to time, Verizon has traded at an above-market multiple, such as in 2011 and 2012.
Time will tell how the AOL acquisition works out. For now, Verizon stock is most appealing for risk-averse accounts stressing income, especially if they have a long-term investment perspective.