Most investors tend to weigh a stock’s valuation prior to purchasing. This is a very important metric, because overpaying for shares can mean buying at the absolute top and feeling the pain as the stock declines. Whether it’s using the company’s historical price to earnings multiple or some other metric, like price to sales or price to cash flow, it is important to have an understanding of a stock’s valuation.
One way to value stocks that dividend growth investors subscribe to is the Dividend Discount Model. The dividend discount model estimates fair value for a stock using the expected growth rate, current dividend and a reasonable discount rate. Let’s see how shares of one of my favorite dividend paying companies, Verizon (VZ), rates using the dividend discount model.
Company Background
Verizon is the largest wireless carrier in the U.S., covering nearly 300 million people in the United States. The Wireless division is responsible for three-quarters of all sales for the company. The remainder of sales come from Verizon’s broadband and cable services. Verizon generated $126 billion in sales in 2017 and has a current market capitalization of more than $225 billion.
Recent Earnings Results
Verizon released 2nd quarter earnings results on July 24, 2018. The company saw earnings grow 26% year over year to $1.20 per share. EPS was $0.06 above the average analysis’ estimate. Revenue for the company grew 5.4% to $32.2 billion. This was $420 million higher than the average estimate.
Verizon added 531,000 postpaid net add during the 2nd quarter, more than doubling net adds from the 1st quarter of the year. Almost 400,000 of these adds were for smartphones. Unsubsidized phones, meaning phones purchased by customers, made up 82% of Verizon’s customer base. This was up from 75% a year ago. Often referred to as the best wireless network, Verizon saw a postpaid churn rate of just 0.75%. A low churn rate means very few customers are leaving Verizon. This is the five consecutive quarter that the company’s wireless retail churn rate was below 0.80%.
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