The Bullish and Bearish Case for Verizon in 2015
The bull market has been running for almost six years now, and the 2014 gain in the Dow Jones Industrial Average was 7.5% while the S&P 500 Index was 11.4% higher. Those index performances do not account for individual stock dividends. 24/7 Wall St. has undertaken a bullish and bearish case to evaluate both sides of the coin to see what lies ahead for Verizon Communications Inc. (NYSE: VZ) in 2015. Verizon closed out 2014 down 0.5% at $46.78, if you include its dividend adjustments.
The stock had a 2014 trading range of $45.09 to $53.66, and the current consensus analyst price target of $52.61 would imply an upside of 12.2% for 2015 compared to the year-end share price. Then there is the dividend yield of 4.7% to consider as well.
The lowest analyst price target on Verizon was $41, which implies a most pessimistic downside case of roughly 13%, while the highest analyst price target of $59 implies an upside of almost 26%.
Verizon has a market cap near $195 billion and has slowly and steadily been growing its sales over the course over the past few years. Comparatively, 2014 was not a good year in terms of the stock’s performance, but revenues are projected to reach all-time highs in the coming year. Within the past five years, this is the first loss that Verizon has posted in terms of its stock performance.
One of the biggest considerations for the year ahead for Verizon is the current price war with AT&T Inc. (NYSE: T), Sprint Corp. (NYSE: S) and T-Mobile US Inc. (NYSE: TMUS). The price war among these giants has put short-term pressure on earnings for Verizon’s wireless segment. One analyst recently commented on the cannibalization that was happening in the price wars as well.
Sprint recently launched a cut-your-bill-in-half promotion to try to lure customers away from the big two, and both Sprint and T-Mobile will pay early termination fees for new subscribers. Verizon and AT&T have been forced to cut prices to match the offerings from the little two.
One of the biggest comparisons that can be drawn between Verizon and AT&T going into 2015 is the dividend yield. Both stocks were previously listed as preliminary Dogs of the Dow for having two of the best yields. AT&T has a dividend yield of 5.4% and Verizon’s is 4.7%, but looking forward Verizon has more upside for 2015 at 12.2%, compared to AT&T’s implied analyst upside of 4.6%.
Some investors consider the telecommunications segment to be incredibly similar to the utilities, in terms of how they handle business and their valuations. They pay high dividends and rely heavily on the capital markets, and many investors buy these stocks now that they cannot make any money owning traditional bank certificates of deposit. That being said, utilities are currently trading at a premium to the market after being one of the top performing sectors in 2014. Verizon has a forward price-to-earnings (P/E) ratio of 13.7 for 2015, and AT&T has a P/E ratio of 13.2, so both stocks trade at a rather handy discount to the market.
Defensive investors may have another advantage with Verizon, as it might be one of the best stocks to own during a market sell-off, similar to what we saw earlier in mid-October.
Many investors remain cautious against telecom giants due to low growth opportunities and due to that pricing war. Still, one can only wonder what value investors think with high dividends and such low P/E ratios. Imagine how investors might view these if the Federal Reserve doesn’t get into a serious rate hike mood as soon many market pundits expected as recently as November and December 2014.