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Dial Up Big Gains With Verizon Stock

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One month ago Verizon agreed to pay $4.8 billion to acquire Yahoo’s core operating businesses. The deal received a lukewarm reception in the investment community, and the price of Verizon shares, which traded at $56.10 on the day of the announcement, have since fallen to a current share price of $53.5. In terms of market capitalization, Verizon has lost over $10 billion since the deal to acquire Yahoo was announced.

 

Sector rotation out low growth dividend stocks has also hurt Verizon. A recent string of positive economic reports, including July’s employment report which showed a gain of 255,000 jobs, has increased expectations that the Fed may raise rates earlier than many in the market expect. This sector rotation makes sense because as market expectations for US growth increase, investors usually gravitate toward faster growing stocks, which tend to have low yields. Although market expectations of a rate hike have increased, the Fed will is still widely expected to keep rates low for an extended period of time.

 

A strong case can be made against many “yield plays” in the stock market. Shares of utility and consumer staples companies in particular are trading at very high historical valuations. In the case of Verizon however, the selling may be overdone. Verizon operates the most reliable cellular network in the United States, and the company generates a tremendous amount of free cash flow. The recurring nature of their revenues is very appealing and enables the company to pay a healthy dividend yield of 4.37%, which is more than double the yield of the 10-year US treasury yield of 1.56%. The valuation of the stock is very reasonable as well at a forward PE ratio of 13 times expected 2017 earnings.

 

In a dull market, where most stocks are fairly valued, Verizon offers an opportunity to generate significant income with the potential for capital appreciation. Sometimes the best offense is a good defense.

 

 

Disclosure:

All of the ideas expressed in this article are the opinions of Ideal Asset Management LLC

Before trading on any of the information in this article, consider consulting your financial advisor to make it suits your financial goals

Ideal Asset Management owns shares of VZ for its clients

All investments carry the risk of loss

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