Table of Contents
Introduction
Verizon communications Inc. is a conglomerate business that deals with telecommunication in both wireless and landline sections. The landline section has shown a diminishing record of sales while the wireless section has shown an augmenting record of sales (strong broadband and cable services). Verizon recently purchased AOL and this is buyout is expected to improve its business. As of October, 2015 it is reported to have had a strong dividend yield of 4.83, attracting a number of investors to its stock. However, when compared to dividend yields, the utility stock is known to pay higher because of the conventional cash-producing natures of the business. The stock dividend yield is the value obtained by dividing the annual dividend by the share price. Usually, the stock dividend yield does not indicate the financial strength of a firm; hence a comprehensive analysis of financial statements is critical.
The dividend history of Verizon
In 2000, when GTE merged with Bell Atlantic, the new company formed was named Verizon Inc. Since 2000, Verizon Inc. only managed to increase its dividend in 2005, for the first time. Since 2005, it has managed to have a continuous dividend increase until 2016. The dividend growth has been steady, averaging to 3.3 percent every year for the last decade. While the company’s dividend history has been impressive, there is still need of examination of other factors such capital expenditures, debt burden and cash flow to determine the sustainability of the dividend and whether Verizon might be facing any obstacles in improving its dividend.
Dividend yield is often used to make comparison of companies for their purposes of income. The value is computed by dividing Verizon’s dividend per share by the price of stock. Since February 2015, the dividend yield of Verizon has been 4.4 percent. This value is bigger than its 3.7 average and can only be compared to the index of S&P500. The average dividend yield for Verizon for the last half a decade was 4.6 %. However, when compared to AT&T it is slightly lower.
The free cash flow payout ratio
This is the difference between the operating cash flows and the capital expenses. To put in simple terms, it is the cash flow that remains when the firms re-invests. The management of cash flow payout ratio requires a large percentage of cash flow. During the first six months of the year 2015, the free cash flow payout for Verizon amounted to 40 percent. The financial performance of Verizon since the year 2013 reveals that the company has managed to amass a total of $25 billion after payment of dividends. The company also manages to maintain financial flexibility after paying almost five percent dividends. Since the beginning of the year 2016, the company started doing a test on 5 G technology to test its demand. If demand grows to a significant amount, the company could start producing 5G technology on a wide scale, considering the fact that it has large amounts of free cash flow. The large amount of free cash flow implies that is has the potential to support an augmented capital expenditure while maintaining payment of dividend.
Interest coverage Ratio
This is meant to determine the rate at which net income of Verizon is committed to payment of interest on unsettled debts. It could be very troublesome to have high interest coverage ratio since when a lot of cash is used to settle debts, then there will be little cash available to pay the dividends. A desirable ratio of interest coverage ratio would be at least 2. Since 2015, the value of interest coverage ratio for Verizon amounted to 6.23. In 2014, the total value was 4.11 while in 2013 it amounted to 11.98. The amount of earnings that Verizon generates after the government taxes is sufficient to cover its payment of expense of yearly interest. In the past years, the expense of interest rate has risen because Verizon managed to purchase Vodafone in billions of dollars. Despite the company’s level of debts, it is still able to pay interest expense of approximately five billion dollars annually. This amount can be compared to the thirty billion dollars in EBIT in 2015. Therefore, it is logical to argue that Verizon’s coverage of interest rate is adequate.
Ratio of debt to equity (long-term)
When Verizon purchase Vodafone’s wireless unit, it dispensed a significant quantity of long-term debt. The debt that it issued amounted to approximately sixty billion dollars, which is more than twice of Verizon’s debt load. This number seems to be unusual and is highly likely to be questioned by many professional financers; however, there may be several reasons why this number may not be as shocking as it seems to be. The company is completely under control of its interest coverage ratio since it has managed to produce more than sufficient cash flow and net income to cover its entire principal and interest payments. Verizon’s purchase of Vodafone is anticipated to produce enough return way more than the expected debt of interest rate. The buyout is postulated to be a wise business decision for Verizon in spite the company’s debt issuance.
The ratio of price to earnings
This ratio informs the financers of how the market values Verizon’s earnings. The value is computed by dividing Verizon’s stock price by the earnings for every share of the last 12 months. This ratio offers a suitable method of comparing companies but it is always misused because the expected earnings, risk and profitability of Verizon ought to be controlled for comparison with other companies. Since February 2016, the company’s ratio of price to earnings has been 20.2 and this is less than its service industry which is 25.5. This ratio wavered from 14.8 to 10.1 for the years 2012 and 2014 respectively. While Verizon’s ratio of price to earnings is usually between 15 and 20, the ratio often varies because of the charges that do not recur, for instance, costs of wireless transactions and pension. This ratio is below that of T-Mobile and AT&T, which are 64.1 and 38.5 respectively. However, the ratio is more than U.S Cellular which is 14.4. When compared to both AT&T and T-Mobile, Verizon appears to be cheap, but the best way to make comparison of companies is to compare their expected rates of growth, net margins and measures of risk to come to a reasonable conclusion.
The Net Margin
This informs the financers how much profit Verizon is able to earn for the mutual shareholders in relation to the sales. Net margin that is very high gives an impression that Verizon operates at a high efficiency and has a sturdy efficiency of costs and power of pricing. The net margin of Verizon may also vary with time because of the numerous nonoperational losses and profits, for instance, expenses on litigation, asset sales and other items that do not recur. The period of 2005-14, the net margin of Verizon varied from 9.85 to 0.76 percent while the mean net margin was 5.5 percent. In the most recent record, Verizon managed to generate a net margin of 7.86 percent. The net margin also got pressured due to the completion that had grown amongst the telecommunication firms to attract customers with lower rates for wireless products. Therefore, when compared to T-Mobile (which is 1.55 percent), AT&T (which is 3.68 percent) and U.S cellular (which is 5.52 percent), Verizon seems to have a favorable net margin. However, financial analysts are often attracted at the nonrecurring items when making comparison of firms so that they are sure that the firm’s margins of profits are not misrepresent by items that have not been incurred.
Return on investment (ROI).
The ROI is used to assess the earnings of a firm with respect to the capital invested in it. To compute the ROI, financers divide the firm’s profit of after tax by the sum of the equity book value and net debt. The return on investment is used to make comparison of returns for various firms that apply distinct mix of equity and debt. As of September 2015, the ROI of Verizon amounted to 10.88 for the last 12 months. From the year 2005 to 2014, the average ROI was valued at 8.07 percent. Verizon’s ROI is most probably more than the cost of capital considering the fact that it has a low rate of interest. This shows that the firm is bringing value to its shareholders. The ROI of Verizon is also quit distinct when it is compared to its competitors.
Conclusion
The above financial analysis of Verizon puts it at a position where it can be considered as a strong and sustainable firm which has the potential of increasing its dividend for the long term. It has a dividend yield of approximately five percent and is highly suitable for any investor who wants to invest in the firm.
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