VZ Stock – is Verizon’s Stock a Good Buy Today – $VZ

Hi I’m Jimmy in this video I’m going to walk from my analysis
of Verizon Communications ticker symbol VZ. This is a twenty seventh video in
our series where we’re analyzing all 30 stocks in the Dow Jones industrial average. We then get to take that analysis. We’re going to build three different
portfolios a dividend a value and a growth portfolio. You could see a link in the
description below to all the other videos we’ve done so
far. OK. So Verizon’s business can be
broken into two main segments wireless and wireline and as we could see the wireless
segment is the largest segment by far and accounts for about 76 percent of
the revenue during 2018 and the Wireline segment accounts
for the other 24 percent. So let’s start at the Wireline
segment. The Wireline segment provides data and video services networking
solutions security and voice services. Now we all know that this segment of
their business has been shrinking in recent years
which is why Verrizon has been focusing their wireline efforts on their
fiber based network under the Fios brand. This is a chart of revenue for the wireline business going back to 2009. And as we could see it’s been
trending lower for a long time. This big drop right here. Well this is when Verizon so the
piece of their business to Frontier Communications and revenue has continued to trend lower ever since then. Now let’s jump over the wireless
signal which is where the real growth potential is and this is revenue for the wireless
segment. And I actually found it quite
interesting that revenue was trending higher for quite some
time. And then in 2016 and 2017 revenue began to pull back. And then once again in 2018 we saw a nice jump. Now if we switch over to the company wide revenue this is what that looks like. And as we could see total company
revenue looks very similar to the wireless
segment. Thanks to the dominance at the
Wireless segment has on total revenue. Now let’s look at a few more numbers before we go ahead and try to value Verizon stock and then we’ll dive into some key
developments that have been happening to Verizon and to the industry in general and was some key points that I think
we should watch going forward. So up next is net income. And as we could see net income looks great especially when we consider that revenue struggled to get to the old 2015 highs and net income would flying right by
those highs. So when we see this we know that net
income margins must have gotten better. This is what net income margins look
like going back to 2009. And as we suspected margins have
gotten significantly better. Now personally when I see this I want to know why is this happening. Are they raising prices. Are they cutting expenses. Do they have more effective
marketing. So I dug in a bit and it seems that Verizon has been trying to they’ve been pushing the
fact that they’ve been trying to lower
operating costs. Well in fact when they announced
their 2018 earnings they beat analyst
expectations with better than expected margins which in theory implies that they
are doing a good job of cutting operating
expenses along the same lines. Capital expenditures came in lower than analysts expected as
well which also led to stronger free cash flow. And with that in mind it makes a lot of sense to try to use free cash flow or discounted cash flow to try to value Verizon stock. So how about we start there. So this is Verizon’s free cash flow going back to 2009 and the first thing that jumps out
to me is how volatile it is and this type of volatility will actually make it tricky to use this discounted cash flow to value rising
stock since what we’re really looking for is we’re looking for a very stable
free cash flow. Let me show you what I mean. So when we add analyst projections
to this chart what we can see that analyst free cash flow expectations going out the next few years is
fairly stable and we know that it’s
unlikely that free cash flow will shake out the way
that analysts are predicting it. But we can tell that by simply
looking at the previous 10 years or so and look at that volatility how is
it going to stabilize so quickly. But as an analyst I understand that it could be very difficult and almost impossible to predict the
various changes in capital expenditures or incoming cash to come up with free cash flow with any extreme accuracy especially in a rapidly changing
business like Verizon’s business. Okay. So let’s see how our valuation of Verizon stock shakes out using the
discounted cash flow method and then we should probably go out and try to value VZ using a price to earnings
multiple as well just so we could double
check our fair value since we know that
this one’s volatile volatility makes it a bit shaky at best. So the first thing we need is a
discount rate. And as we can see here I elected to use 9 percent for a weighted average cost of capital. I have a growth rate of 2.5 percent which gives us our fair value. And then we divide that by the
shares outstanding and we end up with a fair value for verizon stock of seventy three
dollars per share. Now just so we’re all on the same
page and we try to break this down a bit. So we for the weighted average cost
of capital we elected to use 9 percent to come up with that. This is what the
formula looks like. And as you could see the weighted
average cost of capital actually came in at eight
point four percent. I rounded it up to 9 percent just to be a bit more conservative
of because the higher the cost of capital we
use the lower the fail value. Now if you were wondering how to
calculate this actually have videos on this
type of thing in the description below. So you might want to take a peek at
those if you’re not sure how to how to come up with these numbers. The cost of debt is actually quite simply. You just get that from what
they pay on their bonds. You weight that cost of equity is a
bit trickier. For that I use the capital asset
pricing model once again link in the description
below. Next we use 2.5 percent for the perpetual growth rate and this perpetual growth rate is important because it
helps us come up with the terminal value and the terminal value for this type
of valuation is crazy important. Basically what the perpetual growth
rate does is it tells us how how much are things going to grow
forever. So it’s actually off though off of what we could see on this chart but after that we determine how much is free cash flow going to grow forever. We say 2.5 percent it’s a reasonable number to use. Typically they say they should use something that is about in line with the average growth of GDP. Typically I see most people use
between two and a half percent. Yet two and half percent and 3 percent. I liked it for 2 percent because
again it’s a bit more conservative to use
a lower growth rate. Okay so we have a fair value. Seventy three dollars per share for
Verizon stock using the discounted cash flow
method. How about price to earnings. Well right now Verizon’s stock is trading at a forward PE of about 12x their 10 year average for their forward PE is a bit over 13x. Now if we jump back to the net
income margin chart what we could see that margins
have drastically improved quite consistently over the past years which tells me that Verizon should probably be trading at a higher multiple than their 10
year average since margins are now better than
they were over the past 10 years. So if we were to use 14 x which
seems like a reasonable number to use
based on their improved margins well that
would give us a fair value of Verizon stock of
about sixty five dollars per share. Right now Verizon is trading at
about fifty seven dollars a share so it’s
sixty five looks decent and seventy three based on a
discounted cash flow looks even better. Now one final thing I want to bring
out around the future of Verizon is that Verizon has been pushing hard towards 5G which they believe will be the next big driver of
growth for their business. And this is important because it hasn’t been all a good thing for Verizon in past years. They bought AOL and then they bought Yahoo. And neither one of them panned out
the way that Verizon would have hoped. They closed on the GO90 mobile
streaming platform back in 2018 and that hasn’t worked out
completely the way they’ve wanted to up to this
point yet. On the flip side free cash flow
has gotten stronger in the past few
years and that has led to continued
dividend increases. Now many analysts are expecting for Verizon to be able to roll out 5G and they expect that that will in
fact improve growth for the company. So overall I’m a big fan of Verizon and from what I’ve read
about 5G it seems that it can shake out to be all that Verizon’s hoping it
will be. And if this does happen well it could push for risings revenue and profits into an extended growth period which would be great
for rising stock and could ultimately lead Verizon’s
stock to hitting the low end of our range
of sixty five dollars per share or the high end at seventy three
dollars per share. But what do you think should Verizon
stock be added to any of our portfolios. They have a dividend yield of about
4 percent which makes VZ stock in my mind a shoo in for the dividend portfolio. I think I also like Verizon for both the value and the growth portfolio. But what do you think. Is there anything that I missed in
my analysis that we should consider. And either that will keep it in in the portfolio or take it out. Let me know what you think of the
comments below. And thank you for sticking with me all the way to the end of
the video. They haven’t done so yet. It’s the thumbs up. Hit subscribed. I’ll see in the next video.

20 Replies to “VZ Stock – is Verizon’s Stock a Good Buy Today – $VZ”

  1. Hi Jimmy! Thank you for your great, informative and useful videos. I’m just starting out and was wondering if there is an investment research tool/software (preferably free or low cost) that pulls the numbers from a company’s financial statements and runs ratios and calculates CAPM and WACC, etc.?

  2. Hey Learn to Invest. Good video after watching this video and your analysis on AT&T which would you believe to be the better choice of you could only go with 1 pick? Thanks 🙂

  3. I have T in my portfolio… would it be unnecessary to add VZ? since both are a telecommunications company

  4. Thanks a lot for sharing VZ. I was guessing you would post this today. I am holding T and VZ both because I love their dividend and their possible 5G bright future. Going to hold them long term and see what happens.

  5. Great analysis man! Verizon is a great dividend stock and large player in the telecom industry

  6. Thanks Jimmy. I would personally not choose VZ as its debt levels are too high for my taste after their several acquisition sprees: Debt / Equity is more than 2. In addition to be risky for the investor, this will impact their flexibility in the future, right when they will need to invest heavily into 5G infrastructure. In addition, all this debt was spent on worthless acquisitions (Yahoo and AOL), hence that does not demonstrate a very good management in my opinion. I would hate to invest in VZ and then hear that the management decided on another foolish acquisition, impacting even more an already bloated balance sheet.

  7. I love all your stock analysis, Jimmy. But like Fabien, I will not buy VZ because debt is too high. In fact, I think it is risky to buy a dividend stock with high debt and/or high Goodwill. See what happens to Kraft Heinz (KHC) recently: a 15.5 billion dollars impairment charge forcing KHZ to cut dividend by 36%! Stock price dropped from $48 to $32! I prefer a dividend stock like Novo Nordisk having no debt and large moat. What do you think?

  8. I have it for dividend. It would be interesting to see what 5G does for the stock growth. I think everyone should have it in their portfolio. Thanks for posting this fine video showing Verizon's info. I would like to add more to my position on any price weakness.

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