In late July, Verizon (VZ – Free Verizon Stock Report) won an auction process to acquire the core domestic business of Yahoo! (YHOO) for $4.8 billion in cash. This includes the company’s search, e-mail, and advertising business. Digital advertising is a key reason for the deal, and Verizon plans to integrate Yahoo!’s operations with those of its AOL subsidiary, which Verizon acquired in 2015. Note that the acquisition does not include Yahoo!’s 15% stake in Alibaba (BABA), its 36% stake in Yahoo! Japan, its cash, or its noncore patents. The transaction is subject to approval by YHOO shareholders and various regulatory bodies (including the SEC), and is expected to close in the first quarter of 2017.
Although Yahoo! has had an uneven performance in recent years, it is attractive to Verizon because it has more than a billion monthly active users (including 600 million monthly active mobile users). The company generated more than $1 billion of mobile advertising revenues last year, and Verizon has more than 100 million wireless customers. Still, Verizon faces a challenge to attract digital advertising, considering the dominant positions of the Google subsidiary of Alphabet (GOOG) and Facebook (FB).
Turning to the full-page report on Verizon in The Value Line Investment Survey, the Dow-30 component’s stock has some appealing features for investors. (Note: The report was written before the acquisition announcement, and as per Value Line policy, our estimates and projections would not include the Yahoo! acquisition until the takeover is completed.) Most notable, is an above-average dividend yield, as shown in the Top Label. At over 4%, this is nearly two times the median yield of all dividend-paying equities under our coverage. Moreover, Verizon’s board of directors has increased the disbursement every year since 2007, as can be viewed in the Statistical Array. (Recent quarterly dividend hikes are shown in the Quarterly Dividends box.) In addition, the stock is not priced expensively. The relative price-earnings ratio shown in the Top Label is well below 1.00, indicating a wide discount to the market multiple, and the Array shows that this issue has usually traded at a market discount since 2000.
There is a good reason why Verizon stock typically trades at a discount, however. The Array displays a track record of inconsistent earnings. Consecutive years of profit increases are the exception, not the rule. Indeed, our analyst estimates a slight earnings decline in 2016, followed by just a modest uptick in the bottom line in 2017. Moreover, although the company’s annual dividend boosts are welcome for investors, the Annual Rates box shows that increases have been coming at just a low single-digit pace, which isn’t likely to improve over the period to 2019-2021.
The blue-chip company is financially strong. Ordinarily, the high debt-to-total-capitalization ratio listed in the Capital Structure box might be worrisome, but this box also shows that Verizon is earning its interest more than seven times. This indicates healthy coverage. As of March 31st, the company had more than $5.8 billion in cash, as can be viewed in the Current Position box. Verizon has a Financial Strength rating of A++, our highest, which is displayed in the Ratings box. With a market capitalization of more than $200 billion, the company is clearly large enough to handle a takeover like the one that was just announced.
Verizon stock is suitable for conservative investors. The Ratings box indicates that it has a top-notch mark of 100 for Price Stability. This, combined with the company’s outstanding grade for Financial Strength, provides this issue with a Safety rank of 1 (Highest). This is displayed in the Ranks box. This section also shows that the equity is only an average choice for Timeliness, so the stock is not expected to outperform the broader market averages in the next six to 12 months. For investors looking ahead to the 3- to 5-year period, however, Verizon offers appealing total return potential, particularly on a risk-adjusted basis. That said, the pending acquisition of Yahoo! will add some uncertainty to our estimates and projections. There can be no assurance that the deal will meet management’s expectations.