Verizon Communications (NYSE:VZ) is a powerful telecom company that is a steady earner and good growth characteristics. But VZ stock is probably fairly valued at this point, despite its growth. Yet it pays a safe and growing dividend and an attractive dividend yield.
So far this year VZ stock dropped 4.67% and is down 2.66% over the past year. Therefore, I guess it is a good thing that the stock now has a 4.3% dividend yield.
This means that the stock’s total return for investors has been basically flat over these time frames. That is nothing to write home about, but on the other hand, it beats having a losing investment.
But with this kind of stock performance, should investors care about the company’s financial results? The answer is only if those results can give us an insight into how well the stock will do in the future.
Mediocre Financial Results
On an adjusted basis, Verizon had no growth in earnings in Q3. It earned $1.25 last year and made exactly the same this past quarter. Moreover, the company’s operating revenue fell by 4.1%.
However, one bright spot was the company’s operating cash flow. Year-to-date it is up more than 21% to $32.5 billion. Moreover, its free cash flow (FCF) is up 27% year-to-date to $18.3 billion.
As readers of my articles know well, I like free cash flow. That is what allows a company to pay down its debts, pay dividends to shareholders as well as buy back stock.
And Verizon did some of this with its free cash flow. In the past nine months, it paid dividends that cost $7.6 billion. But it did not buy back stock. It did pay down some debt but then borrowed more. As a result, the company increased its cash balance by $6.3 billion so far this year.
In other words, Verizon is playing it safe. Despite the increase in FCF, it only slightly increased spending on dividends and did not buy back any stock. Along with the increase in debt, this is not going to lead to a higher stock in the long run.
What Analysts Say About Verizon
Most analysts are reasonably positive on VZ stock. For example, Seeking Alpha shows that average earnings per share (EPS) for this year puts it on a price-to-earnings (P/E) multiple of 12 times earnings.
And for next year, EPS is forecast to rise just 2.68% to $4.95 per share. That puts it on a multiple of 11.74 times next years’ earnings.
However, this is about the average for the stock. For example, Morningstar reports that over the past 5 years, the stock averaged 12.6 times earnings. That implies that stock is worth just $62.37 per share (i.e. 12.6 times $4.95 EPS). This represents a potential gain of just 6.6% above the price as of Nov. 6.
This is similar to what the Yahoo Finance survey of analysts’ reports. The average price target of 24 analysts is $62.30 per share.
Similarly, TipRanks.com reports that 10 analysts have an average price target of $62.59 per share. Here is the bottom line. Nobody thinks Verizon is going to make a lot of extra money. Their projections for growth is very low, and that shows in their price targets for the stock.
What to Do With VZ Stock
One thing that I like to do with a long-time dividend-paying stock is to check to see whether it trades at a higher yield than its average. That helps you determine whether the stock might rise further, assuming it returns to its average yield.
But that is not the case here. According to Seeking Alpha, Verizon’s average dividend yield over the last four years was 4.63%. But the problem is VZ stock now has a 4.29% dividend yield. And this is after the company’s most recent dividend per share increase.
This implies the stock needs to fall 7.3% to get down to its average 4.63% dividend yield. Therefore, combining the P/E based valuation with a 6.6% gain, along with the dividend yield 7.3% implied drop, VZ stock is at fair value.
In other words, don’t expect much out of VZ stock over the next year. So far that is exactly what has happened this year.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.