Verizon Offers a 6.1% Dividend Yield, But Is It a Smart Investment?

Key Takeaways:

• The 2-Minute Valuation Model values Verizon stock at $55 per share in 2 years.
• That’s a potential 25% upside from today’s share price of $44.
• With a substantial dividend yield of around 6.1%, Verizon could offer investors a total of 12% annual returns, with the combination of slight earnings growth, multiple expansion, and the dividend.
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Verizon Communications (VZ) stock has been beaten down in recent years, but it might be offering something investors don’t want to ignore: a high dividend yield and a path to steady returns.

Between a 6.1% dividend and a modest rebound in earnings, the stock could deliver solid double-digit annual returns without needing much to go right.

Here’s a quick look at the numbers.

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What is the 2-Minute Valuation Model?

Three core factors drive a stock’s long-term value:

1. Revenue Growth: How big the business becomes.
2. Margins: How much the business earns in profit.
3. Multiple: How much investors are willing to pay for a business’s earnings.

Our 2-Minute Valuation Model uses a simple formula to value stocks:

Expected Normalized EPS * Forward P/E ratio = Expected Share Price

Revenue growth and margins drive a company’s long-term normalized earnings per share (EPS), and investors can use a stock’s long-term average P/E multiple to get an idea of how the market values a company.

Why Verizon Stock Looks Undervalued

Forecast

Verizon’s earnings have declined in recent years due to weak performance in its wireline business, rising competition in wireless, and heavy spending on 5G infrastructure that pressured margins and increased debt. Sales have been pretty much flat in the past few years, but EPS fell pretty substantially with margin compression.

Analysts expect Verizon’s earnings to grow over the next three years as the company expands its broadband and fiber footprint, drives higher wireless service revenue through premium plans, and improves operational efficiency to grow margins.

This earnings growth for VZ stock is likely to be driven by:

• Network Advantage: Verizon has consistently invested in its network infrastructure, positioning it well for the ongoing 5G rollout and future connectivity demands.
• Subscription-Based Revenue Model: The company’s business model generates reliable, recurring revenue streams from its large customer base, providing stable cash flow.
• Defensive Business Nature: Telecommunications services are considered essential, making Verizon relatively resistant to economic downturns compared to more cyclical industries.

View Verizon’s full analyst estimates (It’s free) >>>

Is Verizon Stock Undervalued Right Now?

Verizon’s current valuation metrics make it interesting for value and dividend investors. The stock is trading right around its historical average multiple, which means the stock could be just about fairly valued today.

However, Verizon also offers a substantial dividend yield of approximately 6.1% today, making it one of the highest-yielding stocks in the S&P 500. Even if the stock is right around fairly valued, investors will still benefit from the high dividend yield, and slight earnings growth.

For our valuation, we will use a forward P/E multiple of 10x, which is pretty conservative for a stock with a 6% dividend yield and over 2% annual expected EPS growth.

Fair Value of VZ Stock

Using our 2-Minute Valuation Model and applying a conservative approach:

• Conservative 2027 EPS estimate: $5
• Conservative forward P/E multiple: 10x
• Expected dividends in the next 2 years: $5

Expected Normalized EPS ($5) * Forward P/E ratio (10x) + Expected Dividends ($5) = Expected Share Price ($55)

The 2-year expected fair value for Verizon’s stock (including dividends) would be $55 per share.

With Verizon stock currently trading at around $44, this implies that the stock today has a potential upside of approximately 25% over the next two years, or a 12% annualized return.

Keep in mind, this is just a valuation exercise, and we don’t know for sure what the stock’s price will be in the future.

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What is the Target Price for Verizon Stock?

Analysts have an average price target of around $48 per share for VZ stock, indicating they see about 9% upside for the stock today:

Analysts think Verizon stock is pretty close to fairly valued today. Still, it’s a good stock for dividend investors with its high dividend yield.

Risks to Consider

Even though Verizon looks like a great high-yield dividend stock today, investors should be aware of several risks:

• The telecommunications industry remains highly competitive, with pricing pressures that could impact margins.
• Ongoing network investments require substantial capital expenditures, which could limit free cash flow growth.
• Verizon carries significant debt from spectrum purchases and infrastructure investments, which could become more burdensome if interest rates remain elevated.
• Unlike high-growth tech companies, Verizon operates in a mature industry with modest growth prospects, limiting its potential for substantial capital appreciation.

TIKR Takeaway

Verizon offers a compelling proposition for dividend investors seeking reliable dividends with modest growth potential.

While it’s unlikely that Verizon’s stock price is going to soar, the combination of its high yield and steady business model creates a potential annual return that exceeds the stock market’s long-term average annual return of about 10%.

Is Verizon stock a buy over the next 24 months? Use TIKR to check the stock’s analyst price targets, growth forecasts, and see if the stock is undervalued today.

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Disclaimer:

Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any stocks mentioned. Thank you for reading, and happy investing!