Recent Buy in April 2019

Investing is anything but rocket science. You don’t need to have a Ph.D. in Finance or an IQ of 140 to be good at it. Most of all, successful investing requires creating a plan and following it consistently. This is how you build wealth. It’s a slow process but it gets extremely powerful the longer you stay in the game. My plan is about investing in dividend growing businesses and build up these positions over time. Doing so I intend to create a cash flow stream that can cover my costs of living one day. In April, it was about time to select the next investment and move one tiny step further towards this goal. I have decided to go with the well-known telecommunication company Verizon.

On April 8, I have purchased 28 shares of Verizon Communications Inc (VZ) for a total investment of €1,465.52 ($1,651.65). Verizon is a new position and the 30th company in my DGI portfolio.

Because I bought VZ before the next ex-dividend date (April 9), the SF portfolio will receive $0.603 per share on May 1.

Verizon Communications Inc

Dividend Yield: 4.1% | 5-yr. Dividend Growth Rate: 2.70% | FCF Payout Ratio: 60% | Consecutive Dividend Increases: 14 years

First, let’s have a look at what Morningstar has to say about Verizon in general: Verizon (VZ) is now primarily a wireless business (70% of revenue and nearly all of operating income). The firm serves about 88 million postpaid and 5 million prepaid phone customers and connects another 23 million data devices, like tablets, via its nationwide network, making it the largest U.S. wireless carrier (source: Morningstar.com).

In other words, Verizon is leading the wireless market in the U.S. Indeed its 4G LTE covers over 98% of Americans. With the rollout of 5G, Verizon is in a comfortable position to drive earnings growth in the coming years.

Of course, you can’t speak about Verizon without mentioning its biggest rival AT&T. Interestingly, these two largest US phone companies are heading in different directions. While AT&T is diversifying more beyond the pure phone business, Verizon increases the focus on its network. I don’t know which strategy is superior over the other but the latest share price moves suggest that investors have a clear preference: Verizon.

(source: Morningstar.com)

Looking at 1Y, 3Y, 5Y or 10Y performance, the total return of VZ (blue line) is well above the total return of T (red line). We don’t know what the future holds, but Verizon obviously proofed to be a good quality investment so far.

Quality Snapshot

Some widely used quality indicators underpin the statement that Verizon indeed might be a high-quality company. In February 2019, Dave van Knapp reviewed Verizon and published the result at the DTA website. Here is what we find when consulting Value Line, S&P CR, Morningstar, and SSD:

(source: DTA website/Valuation Zone)

There is a lot of green as you can see. Value Line assigns the highest grade – both in safety and financial strength. The dividend safety score (by SSD) is 88, which is in the highest section, too. The only metric that is lagging behind is the S&P Credit rating. Verizon achieves a BBB+ here. Even though I favor high and upper medium investment grades (A- and above), VZ’s credit rating does meet my minimum requirement for investing (min. BBB-).

Valuation snapshot

Verizon’s share price trades close to its 52-week high. For that reason, some folks might be reluctant to invest in VZ today. However since short-term price movements are hard to predict, I prefer to send the money to work immediately when a good opportunity is knocking on the door. Keep in mind, my investment horizon is long-term. Look, I plan to build this position up in size over a period of 15 years. And in 15 years from now, it will matter very little whether I paid $59 or $55 for VZ today.

Even though Verizon’s share price went up nicely during the past months, we have good reasons to believe that VZ is not overvalued today. Looking at the FastGraphs’ forecasting calculator we see a current P/E ratio of 12.4. It is still below the historical valuation – the normal 5-Yr. based P/E ratio is 13.5. The corresponding Price/FV ratio of 0.92 (=12.5/13.5) is indicating that VZ might be 8% undervalued. Personally, I require a minimum P/FV ratio of 0.90 (min. 10% discount) to call a stock undervalued. That is why I classify VZ as fairly priced based on its historical valuation.

Besides historical valuation, I like to include Morningstar’s service into the valuation process. Morningstar utilizes the discounted cash flow approach to find the fair value estimate. Morningstar’s analysis says that Verizon has a Price/FV estimate of 1.01. That means Verizon is fairly valued at the moment. Last but not least, I use a simple average of four different valuation methods to derive the final result. Running the numbers, I get a Price/FV estimate of 0.97. So here again, Verizon appears to trade in a fairly priced territory.

Summary

Verizon is a company that many of my fellow investors would consider a core investment. Telecommunication firms operate in a more or less defensive environment and offer a reliable income. Verizon also seems to do the right things to prepare for the future. At least its latest stock price moves suggest that. The market is rewarding VZ with a higher valuation – compared to AT&T for example. For now, VZ seems to win over T. Maybe the situation will reverse, maybe VZ’s share price will drift further apart. Nobody knows for sure. Personally, I don’t even try to pretend to know that. All I know is that I own T and have always wanted to own VZ as well. Both companies will provide me with a decent income stream for the future.

6 Comments

  1. Div.Income April 14, 2019 at 7:12 pm

    Hi,
    congrats on that buy. Verizon is one of my oldest stocks in my portfolio. It delivers good results and steady dividends. For sure a good choice :).

    Reply
    1. Snugfortune April 15, 2019 at 5:16 pm

      Good to see you are happy with VZ and that it was a successful investment for you so far.
      Let’s hope for more good years ahead.

      Reply
  2. Dividend Deluge April 15, 2019 at 6:21 pm

    Solid purchase! I was torn between AT&T and Verizon last autumn, but decided to buy AT&T first. Still I would like to add another high quality Telecom to my portfolio if I had extra funds.

    Reply
    1. Snugfortune April 15, 2019 at 10:25 pm

      Like yourself, I went with T first. Basically valuation was the main reason for my decission in favor of T. But I had VZ always on my radar.
      Finally I was able to put my hands on VZ too. Happy to own both now.

      Reply
  3. dividendsdiversify April 18, 2019 at 2:31 pm

    Hi SF. Long time holder of VZ here. I also own T, but VZ has shined from a total return perspective in comparison. The 2 have also gone different paths strategically. Time will tell if T can pull itself off the mat after all the big acquisitions. Tom

    Reply
    1. Snugfortune April 18, 2019 at 6:47 pm

      Yup..VZ was superior when it comes to past performance.
      But lately I’ve been reading many positiv analyst reports about T.
      However the media/content landscape is not a easy (I think about competitors like DIS, NFLX or CMCSA). As you said, time will tell.
      In the meantime, I like having both in my portfolio.

      Reply

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