Verizon is an America-based multinational telecommunication company. Founded in 1894 as Bell Atlantic, it has grown significantly by acquiring other businesses. After buying the majority of the British Vodafone in 2000, it continued to acquire other smaller competitors in order to reach the country's highest network coverage. Slowly but surely Verizon has become the second largest telecommunication company in the US after AT&T. Its most remarkable acquisition had been American Online (AOL) which was followed by the purchase of Yahoo! two years later.
Nowadays Verizon is a major player in the telecommunication and online streaming sector as well as an important PC vendor. It owns the second biggest mobile coverage network with more than 143m subscribers.
| 2018 | 2019 | 2020 | 2021 | 2022 | |
|---|---|---|---|---|---|
| Revenue (m USD) | 130863 | 131868 | 128292 | 133613 | 136835 |
| ROE | 36,2% | 38,83% | 29,84% | 49,37% | 27,19% |
| EBITDA (m USD) | 39681 | 47060 | 45518 | 48654 | 47566 |
| EBITDA margin% | 30,32% | 35,69% | 35,48% | 36,41% | 34,76% |
| Dividend (USD) | 2,385 | 2,435 | 2,485 | 2,535 | 2,585 |
| Dividend yield% | 4,23% | 4,03% | 4,23% | 4,66% | 6,44% |
At the first glance you can see huge numbers which do not fluctuate at all. Regarding the last five years, the company's revenue position is stable: 130-136 B USD per annum. Its EBITDA is also steady. EBITDA comes out to 34-35% of the revenue, this will presumably not change in the coming years. The company has a rock solid revenue generation.
As the return of equity is 30-36% and there is not any negative sign on the horizon, one can state that Verizon operates with a high return of equity on a mature market.
Its dividend yield has been increasing, reaching 8,3%. In comparison to an average yield of a 10-year treasury bond it provides a higher yield up to 3,5%.
As the company's D/E rate is relatively steady and its dividend is growing in the last five years, we are going to use FCFE analysis.
| 2018 | 2019 | 2020 | 2021 | 2022 | |
|---|---|---|---|---|---|
| D/E | 3,95 | 3,72 | 3,64 | 3,47 | 3,15 |
| DIV/FCFE | 0,62 | 1,044 | 0,34 | -3,5 | 0,72 |
We got the yield of the 10 year treasury bond as the risk free rate (4,8%), and we used the last 80 years average premium for the US market as equity risk premium (4,4%) during the analysis. The level of cost of debt is coming from the company AAA bond rating. Calculating with these data we got 4,09% weighted average cost of capital (WACC). We assume that the net income of the company will increase by 4,14% in the next 5 years but after it will grow by 2% annually. Return on investment capital is 7,638% at the company.
Net income is increasing year to year, so the FCFE figures are increasing at the same pace. Discounting the FCFE figures by the cost of capital we get the value of 311611 m USD for the company, which generates 74,2 USD/share value after debts, if we calculate with 4200m shares outstanding. Using our level of margin of safety we receive a 48,97 USD share price.
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023E | 2024E | 2025E | 2026E | 2027E | TV | DCFV | V | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| NI | 15528 | 19265 | 17801 | 22065 | 21256 | 21214,81 | 23461,83 | 25946,85 | 28695,08 | 31734,39 | |||
| FCFE | 15839 | 9650 | 30252 | -3010 | 15074 | 14997,35 | 16585,83 | 18342,56 | 20285,35 | 22433,93 | 25895,26 | ||
| DCF | 14085,72 | 14630,74 | 15196,85 | 15784,87 | 16395,63 | 231619,2 | 311661 | ||||||
| Pe= | 74,20501 |
At the time of the analysis the share price is 31,67 USD which is lower than the target price (48,97 USD vs 31,67USD) so our proposal for the share is: buy.
| 2018 | 2019 | 2020 | 2021 | 2022 | |
|---|---|---|---|---|---|
| ROIC | 6,72% | 9% | 7,73% | 8,55% | 6,49% |
| D/E | 3,95 | 3,73 | 3,64 | 3,46 | 3,15 |
| P/BV | 4,38 | 4,07 | 3,59 | 2,76 | 1,85 |
| P/E | 15 | 12,98 | 13,67 | 10,21 | 7,94 |
| Dividend | 2,385 | 2,435 | 2,485 | 2,535 | 2,585 |
| Dividend payout ratio | 0,622 | 1,044 | 0,34 | -3,49 | 0,72 |
| FCFE/share outst | 3,83 | 2,33 | 7,3 | -0,72 | 3,58 |
| Cash to stockholders to FCFE | 0,47 | 0,99 | 0,336 | -3,35 | 0,5623 |
The return of invested capital is stable, 6-9% a year, this is much higher than the WACC (4,09%) meaning that the company creates shareholder value. It produces more yield on invested capital (cca. 3-4%) than the cost of capital. The company D/E rate is between 3,5 and 4 and it is working with high leverage. The price-to-book ratio has decreased significantly for the last five years, from 4,38 to 1,85. Considering that the share price has decreased and the equity has grown, the company has become cheaper. Due to the decreasing share price and the gradually increasing earning per share, the P/E rate is decreasing and the company is becoming more attractive by valuation perspectives.
The company dividend is increasing slightly on a yearly basis, from 2,385 USD to 2,585 USD while the dividend growth rate is cca 2% p.a. One more important thing is that the net income can cover the dividend payout. 35%-72% of the net income is paid out as a dividend and the rest is held back for reinvestment.
It is quite surprising that the company could pay out, 2 – 3,5 USD as dividend easily, still, it holds back a big proportion of money and pays 1 USD less than these figures. Therefore its current dividend is well covered in the last few years and in the future also. The dividend yield is an outstanding 8,3%, which is much higher than the 10-year T-bond yield (8,3% vs 4,8%).
The cash to stockholders to FCFE rate shows the proportion the company FCFE pays back to share holders as dividend and share repurchases. This percentage has been small in the last 5 years whose main reason was that the company has increased the share outstanding numbers year by year. This means that Verizon pays out a high dividend but this is eroded due to high share numbers.
According to current exchange rates and other data:
| Stock | Price | Shouts | NI | P/E | BV/sh | P/BV | Revenue | P/Sales | Ebitda | EV/Ebitda |
|---|---|---|---|---|---|---|---|---|---|---|
| AT&T | 14,64 | 7150 | -8340 | -12,5511 | 14,25 | 1,027368 | 121440 | 0,861957 | 43410 | 2,411334 |
| Deutsche | 20,45 | 4970 | 5550 | 18,31288 | 11,99 | 1,705588 | 116550 | 0,872042 | 35920 | 2,829524 |
| Orange | 10,82 | 2660 | 1600 | 17,98825 | 11,8 | 0,916949 | 43720 | 0,658307 | 12680 | 2,269811 |
| Telus Corp | 22,36 | 1450 | 1180 | 27,47627 | 11,34 | 1,971781 | 19520 | 1,660963 | 4860 | 6,671193 |
| BCE | 37,54 | 912,3 | 2300 | 14,89032 | 19,01 | 1,97475 | 24580 | 1,393317 | 8650 | 3,959277 |
| VZ | 31,67 | 4200 | 21256 | 6,257715 | 21,65 | 1,462818 | 136835 | 0,972076 | 47566 | 2,796409 |
| átlag | 13,22333 | 1,509876 | 1,089317 | 3,628228 | ||||||
| Pe= | 66,92264 | 32,68881 | 35,4897 | 41,09054 |
Based on its P/E, the company is considered a strong buy compared to its competitors. The sector average is 13,22 while it has currently 6,25. As for P/BV, P/S is fairly valued but considering EV/EBITDA the company is undervalued.
According to the relative valuation using sector averages, the fair price of Verizon share should be somewhere between 32-67USD. The median of this range is cca. 50 USD which is close to our proposed price, so the formula is simple: below 50 USD you must buy this share.
According to our calculations, Verizon has a stable revenue and EBITDA generation. Its leverage is appropriate and its dividends are increasing sustainably.
Our FCFE analysis shows that a 74,2 USD is a fair price. With a margin of safety the price is 48,97 USD which is supported by our relative analysis, as well.
Based on the index based valuation and the relative valuation we suggest to buy the shares at the current 31,67 USD price.
