When investors think of big dividend yields, telecom stocks like Verizon (NYSE:VZ) and AT&T (NYSE:T) come to mind. I am personally long AT&T, but that’s because I was able to buy at a very low level amid the M&A turmoil with Time Warner. Now though, investors are probably wondering if it’s too late to get a piece of Verizon stock.
It’s a good question, given its Verizon’s attractive dividend and solid, dependable business. Let’s take a further look.
Evaluating Verizon Stock
Sales are forecast to grow about 4% this year and just 1% in 2019. Estimates also call for 24.5% earnings growth this year, but just 2% growth next year. Admittedly, it’s tough to follow up a year that has 25% growth, so the fact that it’s even positive could be a selling point.
However, a big portion of that earnings growth can be attributed to the new tax code out of Washington. While that doesn’t make it meaningless, profit is profit, after all, let’s also remember it isn’t purely business driving those big results.
There are positives though, the first being margins. With expected earnings growth outpacing revenue growth, margins should expand, improving Verizon’s profitability. In fact, profit margin has exploded this year, with a trailing net margin of almost 24%. That’s nearly double where it stood a year ago and set to improve over the next six quarters.
Further, shares trade at just 11.5 times this year’s earnings, hardly expensive even among conservative investors.
Verizon currently yields 4.66%, paying a dividend that is almost 60% larger than the interest yield from the 10-year Treasury. Not only is Verizon’s yield more attractive, but it also has positive earnings growth, strong cash flows and improving margins. That’s not to say it’s a safer investment than the United States, but there are clear rewards for owning Verizon stock.
The downside? We will look at the charts in a moment, but I would argue that buying three months ago was much more prudent. Of course, hindsight is always 20/20, but at $47, VZ had a better yield a lower valuation — paying out 5.1% and trading at 10 times earnings.
So my only qualm about the stock and its dividend yield? That we could have gotten a better value just 90 days ago, before Verizon stock became 15% more expensive. InvestorPlace readers did have a heads up though, as we named Verizon stock one our top 7 dividend stocks.
Trading Verizon Stock
So where can Verizon go now? Seeing the stock’s latest run is somewhat surprising, given that we’re heading into the last two quarters of the company’s fiscal year. After that, investors face a year of rather stagnant growth where the focus will simply rest with the dividend.
At the start of this year, the focus was on sales growth, earnings growth, margin expansion and the dividend. It’s rallying in the face of losing several catalysts. That’s why I want to be a buyer on a pullback rather than right here, right now.
I would really like for a pullback to $50, a decline of about 10% from current levels. Verizon stock will hopefully find support from its 100-day and 200-day moving averages. Uptrend support would also be nearby or possibly even at $50, depending on how long this decline takes to play out.
Of course, if it takes a month or two, those moving averages and trend-lines will all move higher. But the point here is simple: Verizon stock is good, not great and while its dividend is attractive, I want to wait for a pullback before getting long.