The market punishes any company’s stock that does not exceed earning and sales expectations. This is nothing new, but it seems more pronounced these days with rising interest rates, high inflation, and the possibility of a recession. Verizon Communications (VZ) is a stock that the market has punished for not performing as analysts expected. The stock price is near the 1-year and 5-year low. However, this has increased the yield of the dividend greatly. At a recent price of $36.50, Verizon’s dividend of $2.61 is yielding 7.15%.
Verizon has not had much growth in the last two quarters, only gaining 12,000 and 8,000 new cell phone customers, respectively, in those two quarters. Verizon has, however, added over 300,000 broadband users during that time. Verizon is constantly battling with AT&T and T-Mobile for post-paid cell phone users and has not done well lately. They have somewhat made this up with the broadband users, but the market is not rewarding Verizon for this increase.
While Verizon’s stock price can always go lower, I feel like the bad news is baked in at this point. A recession could delay any rebound, and that is a possibility soon. However, you would still be collecting a safe 7%+ dividend while waiting for the stock price to recover. Verizon’s inexpensive indicator is a P/E ratio of just 7.9 at this price level. The industry average is 9.45. Another sign that Verizon is historically inexpensive right now is the dividend yield. The 5-year average dividend yield for Verizon is 4.54%. With a current 7.15% yield, the stock price has come down a good bit to cause such an increase in the yield.
Verizon has increased its dividend for 16 years in a row. It also has a payout ratio of about 57% (57% of its earnings go to pay the dividend). This will allow Verizon to keep paying the current dividend rate and probably increase the dividend in the coming years. I look at Verizon as a company that is temporarily down and should recover and one that will pay you to wait for that recovery. Yahoo Finance has a 1-year price target of $47.35 on Verizon. That will give you a capital gain of 29% on top of the dividend if Verizon recovers to the price target.
Full disclosure, I own Verizon stock and think it would be a good addition to an income-producing portfolio. As always, do your due diligence before investing. Sources include Yahoo Finance, Schwab, and Fidelity.
(Intentional Investing is a weekly column written by Kyle Smith from Floyd County, TX, based upon his investment knowledge and does not represent the views or opinions of the Floyd County Record. You can reach Mr. Smith via email insureddividends@gmail.com)
