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Using a Value Line Report: Verizon, Another Telecom Dow Dog – April 6, 2012
Verizon Communications (VZ – Free Value Line Research Report for Verizon) is a member of the Dogs of the Dow club this year. Interestingly, that club also includes AT&T (T – Free Value Line Research Report for AT&T). That would put two telecom members in a portfolio that tracked the Dogs of the Dow. Assuming equal weighting, that would put a massive 40% of the portfolio into telecom, with a heavy bent toward cellular.
That’s a pretty big weighting to just one sector of the market and is an inherent problem with the Dogs of the Dow model. Some industries are represented by just one company, some have two, and some are completely absent from the index. In a normal portfolio, it is unlikely that many investors would place 40% of their assets in any one industry. At the very least it would be considered an aggressive bet.
That doesn’t make either Verizon or AT&T bad investments, however. In fact, in a recent article, AT&T’s many virtues were highlighted (Read AT&T’s Dog of the Dow review). Many of those same attributes are applicable to Verizon, too.
Verizon’s “story” starts with a Safety Rank of 1 (Highest). Each of the approximately 1,700 stocks under review in The Value Line Investment Survey receives a proprietary Safety Rank (found in the Ranks box at the top of each report). This rank measures the total risk of a stock relative to the approximately 1,700 other stocks. It is derived from a stock’s Price Stability Index and the Financial Strength rating of a company; both are shown in the lower right hand corner of each report in the Ratings box.
The Financial Strength rating is a relative measure of the financial health of the companies reviewed by Value Line. The relative ratings range from A++ (Highest) to C (Lowest), in nine steps. They are assigned by Value Line’s team of analysts and editors based on such factors as debt load, company size, and earnings history, among others. These ratings are reviewed quarterly and changes are not made lightly. Verizon receives a top-notch Financial Strength of A++.
Stock Price Stability is a relative ranking of the standard deviation of weekly percent changes in the price of a stock over the past five years. This measure is purely statistical and based on known figures. The ranks go from 100 for the most stable to 5 for the least stable. Companies with more stable share prices get a better score here; Verizon receives a score of 100.
Combining these two measures makes the Safety Rank a nice compromise between investment art and science. Safety ranks are given on a scale from 1 (Highest) to 5 (Lowest). With a Safety Rank of 1 (Highest), Verizon is clearly in the widows and orphans category.
That said, companies with high Safety Ranks tend to lag in market advances. Verizon’s beta, which is 0.70 (found in the Ranks box), is further indication of this. Beta is a measure of a stock’s volatility relative to the overall stock market. The market beta is set at 1.00. If an equity has a beta of 1.00, it will probably move in lock step with the broader market. For example, if the market rises (falls) by 10%, an issue with a beta of 1.00 will probably increase (decrease) by about the same amount. A beta above 1.00 indicates that a stock’s volatility is greater than the market while the reverse is true for betas below one. So a stock, such as Verizon, with a beta of .70 has lower volatility than the overall market, and a broad increase (decrease) of 10% would likely result in a 7% gain (loss).
From an income perspective, Verizon’s recent dividend yield was 5.1% (this figure can be found in the Top Label that runs across the top of each Value Line report). That’s toward the high end of its historical range (historical average annual dividend yields can be found in the Statistical Array). Looking back at the actual dividends paid in each year, however, shows a material difference between Verizon and AT&T. The latter has consistently increased its dividend while Verizon has an irregular trend higher—meaning it raises its dividend, but not necessarily every year. That doesn’t make it a bad investment, but it is worth noting.
Verizon has a modest amount of debt, the level of which can be found, in this case, in the Statistical Array, and almost $14 billion of cash (as of December 2011), a fact shown in the Current Position box.
Interestingly, Verizon also has a Timeliness Rank of 2 (Above Average), found in the Ranks box. This is another differentiating point between this equity and AT&T shares. This proprietary rank is derived via a computer program using as inputs, among other things, long-term price and earnings history, recent price and earnings momentum, cash flow, and earnings surprises. All data are known and actual. Ranks range from 1 to 5 using a modified bell curve. Stocks ranked 1 (Highest) and 2 (Above Average) are expected to outpace the year-ahead market. This is a compelling argument for investment.
The longer-term picture is also solid. Value Line’s Kenneth Nugent projects earnings growth of 5.5% annualized over the next three to five years on 3.0% annualized growth on the top line. Dividend growth, however, is slated at 2.0%, annualized, over that time span—which is just below the historical trend for inflation. (All of these figures can be found in the Annual Rates box.) These growth rates translate into a price gain of between 40% and 75% over that span, which, including the dividend, is a total return of between 13% and 15% annualized.
All things considered, conservative income-oriented investors would do well to consider this Dog of the Dow both now and for the long-term, keeping in mind that dividend growth is likely to be modest.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.