Are Verizon’s Huge Profits And 4.4% Dividend A Buy?
With new cases of the coronavirus spiking in the US and worldwide.
With the already historic unemployment levels and job losses in recent months.
And with many Blue-Chip stocks looking vulnerable when they’re supposed to be among the best areas to invest your capital.
There are few safe places to invest today. And this number grows smaller every day this crisis lasts.
The key to continue compounding your investments and build wealth is to keep investing well over time.
Most people think the number one way to do that is to invest in assets that will grow your capital.
And this is a huge part of things.
But another huge part of this is also losing as little capital as possible.
The fewer investment losses you have the more capital you keep. And the more capital you keep the faster you can invest well to grow your wealth.
In recent articles I’ve shown you several stocks to avoid investing in.
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Today, I want to answer… Are Verizon’s Huge Profits And 4.4% Dividend A Buy?
Verizon (VZ) is one of the United States largest cell phone and data plan operators. It serves more than 90 million customers via its cell phone plans. And it connects another 24 million devices like tablets via its data connections.
Its based in New York City New York. It has a $234.8 billion market cap. And it pays a large 4.4% dividend… Which is reason #1 to consider buying its stock.
Verizon’s 4.4% Dividend
Over the last decade Verizon’s paid out a total of $21.86 per share in dividends.
At today’s count of 4.141 billion shares that’s equal to $90.52 billion paid out to shareholders in that time.
Plus, it raised its dividend 28% in the last decade from $1.93 per share in 2010 to $2.47 per share now.
These dividend payments help you earn cash if you take the money out. Or allow you to buy more shares over time if you reinvest the dividends.
It can do this because it earns huge profits. Which is reason #2 to buy Rio Tinto to Depression Proof Your Portfolio.
Verizon Earns Huge Profits
Over the last decade it earned an average operating income margin of 19.2% per year.
I look for anything above 10%.
Another way to see how profitable a company is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 11% per year on average.
I call this the “Cash Machine” metric.
I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above. If a company surpasses both thresholds it makes it a great operating business that is safe and valuable.
Verizon’s margins on both important metrics are gigantic… This not only means it’s a great operating business. But that its one of the best and most consistently profitable in the world.
This already gives it a huge margin of safety… But due to Verizon’s constant need to maintain and upgrade its cell networks… It has a ton of debt.
Verizon Has A Ton Of Debt
It has $8.98 billion in cash compared to $137.21 billion in debt.
As a percentage of its balance sheet, total liabilities make up 77.98%.
Its debt makes up 58.4% of its current market cap.
And its debt-to-equity ratio is 2.11.
These are all well above the thresholds I look for when considering debt, cash, and balance sheet strength.
This huge debt load makes buying Verizon riskier… Especially with the massive uncertainty with everything that’s going on today.
But what about its valuation? Is it cheap enough to buy?
Verizon Is Sort Of Cheap
With the markets at or near all-time highs you’d expect a good stock like Verizon to be selling at an enormous valuation.
But its not…
As of this writing its P/E is 12.9
Its P/CF is 5.7.
Its forward P/E is 11.4.
And its enterprise value to operating income – EV/EBIT is 14.2.
On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.
And on EV/EBIT I look to buy stocks below 8.
This means Verizon is cheap on the first 3 metrics… But about fairly valued when considering its debt in the EV/EBIT valuation… And fairly valued doesn’t give us enough margin of safety in investing terminology when considering its huge debt load.
When you invest in stocks that have a margin of safety it makes the investment safer. And it also means you should expect to earn higher returns owning it in the coming years.
The inverse of this is also true…
When you invest in a stock without a margin of safety it makes the investment riskier. And it also means you should expect to earn less owning it going forward.
With Verizon about fairly valued right now it doesn’t give you enough margin of safety to buy now. Especially when considering its massive debt levels.
For these reasons I recommend you avoid buying Verizon stock until its debt is lower.
If you’re looking for a solid, safe, stable, and enormously profitable investment to buy to Depression Proof Your Portfolio – consider investing in Verizon. But only when it has lower debt levels.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.