Verizon: Value and Yield

03/08/2017 7:00 am EST

Focus: STOCKS

Chloe Jensen

Chief Analyst, Cabot Dividend Investor

We are adding Verizon (VZ) to the high yield tier of our model portfolio for investors who want to add a high and reliable income stream to their portfolio at a reasonable price, asserts income expert Chloe Lutts Jensen, editor of Cabot Dividend Investor.

Verizon is the largest U.S. wireless carrier, but faces stiff competition. Analysts have taken to calling the carriers’ tit-for-tat promotions “the cell phone wars.” As a result, the stock has been floundering since 2013.

We’re not revisiting Verizon because the cell phone wars are over. To t he contrary, competitive pressures remain high enough that Verizon just reintroduced an unlimited data plan, after nixing the offering years ago.

Shifts in how consumers pay for their devices are also hitting wireless service revenues, and VZ gapped down at the end of January after 2016 results failed to meet expectations.

But the latest disappointments have dragged VZ low enough, and pushed the stock’s yield high enough, that we see a good opportunity for bargain-hunting income investors.

New ventures include growing “internet of things” revenues. Verizon’s ongoing acquisition of Yahoo is part of the latter strategy, which also includes the acquisition of AOL and the launch of the streaming video service Go90.

Combined with AOL’s targeting technology, Yahoo’s ad network is expected to give Verizon a significant competitive edge in monetizing mobile content.

While the last few years haven’t been very rewarding for Verizon investors, the company is committed to returning capital to shareholders. Verizon has paid dividends since 1984, and has increased the dividend every year since 2007.

Based on earnings and estimates, VZ is now trading at a significant discount to the overall market. The stock’s current P/E of 15 and forward P/E of 13 are both well below the average P/E of 21 for an S&P company.

Of course, upside also looks fairly limited in the near term; earnings growth isn’t much to get excited about. But the attraction of Verizon today is its value and its yield, not its growth potential.  Investors looking to add a reliable income stream at a reasonable price can buy.

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