Verizon Communications (VZ - Free Verizon Stock Report) is undoubtedly the most renowned survivor of the Baby Bell era (formerly Bell Atlantic). Indeed, the blue chip has stormed to the forefront of the telecommunications industry, particularly following its foray into the broadband cable television and Internet spaces with a commitment to premium service that has enabled it to leverage its existing telecom infrastructure and establish a commanding presence across both industries. Indeed, its strategic acquisitions and divestitures of underperforming assets have helped improve the outlook for operational efficiency over the next several years, as the company focuses on the expansion of its wireless, FIOS Internet, and FIOS TV businesses.
Still, VZ stock appears to have stalled over the past 14 months. After hitting an all-time peak of $54.30 a share in the late spring of 2013, the issue has been trading within a fairly narrow band, with support and resistance levels of about $46 and $52 a share, respectively. Some of the more bearish pundits argue that, while operational performance has been strong, earnings have been generally in line with consensus calls and are already baked into the current quotation. In this installment of Using the Value Line Report, we will take a closer look at Verizon’s investment merits and attempt to determine whether this telecom giant’s growth endeavors will provide the dexterity and catalysts necessary to accelerate its price appreciation.
Scanning the Verizon page reveals several promising performance measures that ought to pique the interest of investors with varying objectives. The first metric that stands out for this issue is the generous dividend. At 4.3%, the yield (located in the Top Label) is well above the Value Line median and among the highest dividend paying stocks in the Dow Jones Index with a handsome distribution of $2.12 a share. What’s more, the company has consistently increased the annual payout for several years. Moreover, the 3- to 5-year projections to the far right of the Statistical Array indicate that the analyst, Kenneth Nugent, expects Verizon to continue to increase its distributions over the longer term. This should make Verizon an attractive asset to any portfolio, particularly those seeking income.
Although ample dividends should be an appealing characteristic to most investors, for many, there is nothing like a good growth story that will propel a stock’s price and generate impressive capital gains. For Verizon, the case for momentum is valid and viable, but not without its caveats, as demonstrated by the equity’s lackluster price moves over the past year-or-so. Nonetheless, there are growth initiatives at work here that ought to fuel equity-price advances over both the near- and long-term horizons.
One of the more prominent endeavors to that end is Verizon’s aforementioned penchant for strategically beneficial and successful acquisitions. Indeed, Mr. Nugent highlights this in the Analyst Commentary when he discusses “the February acquisition of Vodafone’s (VOD) 45% indirect interest in Verizon Wireless.” Furthermore, he goes on to note that “Additional acquisitions should come as no surprise. To wit, management seems focused on improving Verizon’s strategic capabilities and boosting its spectrum assets…optimizing content delivery and the cloud.” These comments refer indirectly to Verizon’s plans to considerably expand its wireless telecommunications capacity by beefing up its already formidable position as the industry-leading provider of broadband and wireless network speed and efficiency with the introduction of its XLTE service, the progeny to its existing 4G LTE. Although the company currently has a more-modest share of the broadband market versus competitors, including AT&T (T – Free AT&T Stock Report) and Comcast (CMCSA), its technological advances are certain to help Verizon muscle in increasing share of this rapidly expanding market, which grew to 86 million subscribers as of the end of the second quarter of 2014. This effort, combined with other enterprising moves, including plans for a mobile software store to rival the longstanding duopoly held by Apple (AAPL) and Google (GOOG), offers a compelling argument for the stock to break through its recent technical ceiling.
In that vein, glancing across the page to the Ranks box in the top left corner, we see that not only does the stock boast a superlative Timeliness rank of 1 (Highest), this momentum indicator is accompanied by another badge of honor, the highest rank for Safety (1). These scores indicate that this issue offers notable risk-adjusted, year-ahead upside potential versus the broader market averages. Meanwhile, although the company is heavily leveraged and its cash coffers have been sapped by the recent Vodafone acquisition and other such growth investments, we are confident that Verizon has substantial asset liquidity that should enable it to replenish its reserves. Moreover, based on the financial estimates in the Statistical Array, cash flow levels should rebound nicely over the next several years. In addition, the Safety rank is further supported by a Beta score of .70 and a top-notch Financial Strength rating of A++ (located in the Financial Strength box). Verizon’s marks for Stock’s Price Stability and Earnings Predictability aren’t too shabby either at 95 each (out of 100). On the other hand, the score for Price Growth Persistence may spark some concerns about the possible inefficacy of the company’s historical growth ventures. Still, scanning back across to the top left corner of the page, the 3- to 5-year Projections box reveals that VZ offers solid total return potential out to late decade.
All told, we believe that Verizon is a sound investment choice for growth-and-income oriented accounts. Moreover, it suits a momentum-driven approach, as well as a more-patient buy-and-hold strategy. This theory has been buttressed by the sizable inflows from major fund managers and market movers, including Warren Buffett's Berkshire Hathaway (BKRB), which recently made a substantial outlay of over $500 million for 11 million shares.
In conclusion, we contend that Verizon’s competitive potential in the U.S. wireless business is being fortified by the billions of dollars it is channeling into its spectrum and network, a strategy that is quite difficult for its rivals to replicate. Furthermore, its dominance of the domestic wireless market should translate to higher margins and reasonably high barriers to entry. Plus, at roughly 14x earnings, we believe the current price offers a favorable entry point.