Why the Market Is Wrong on Verizon

Contrast that to Wall Street's favorite telecom to kick around, Verizon (VZ), which is up less than 5% since February 9 and a pathetic 10% since the March 2009 lows!

But if you think that's the whole story, think again. A closer look at the numbers will show that Wall Street isn't thinking straight when it comes to Verizon -- probably because short-sighted traders are too busy chasing fads like REITs. Come Verizon's earnings report in two days, however, the market could be singing a different tune.

There are good reasons for skepticism. Relative to the S&P 500, VZ is trading near an 18-month low. In the past year alone, the stock has lagged the S&P by a stunning 4,800 basis points.

Yet the company's fundamentals aren't that bad. Verizon has met or exceeded Wall Street forecasts in each of the last four consecutive quarters, and there's every reason to expect another strong showing on Thursday, April 22, when VZ reports.
Analyst ratings are improving. Standpoint Research initiated coverage in mid-March with a buy rating, just a few weeks after Bernstein upped its rating to market perform.

So what is everybody so afraid of? That VZ might, just might, have to cut its dividend?

Actually, VZ is one of five widely held dividend stocks that are a lock to boost payouts because it commands a higher yield in its dividend than on the company's five-year bonds!

While it's not exactly thrilling that Verizon is paying out 81% of its estimated 2010 earnings in the form of dividends, the telecom giant generates enough free cash flow (thanks to huge depreciation write-offs) to cover the dividend twice over. Absent a double-dip recession, there's almost no risk of a dividend cut in 2010, and the likelihood in 2011 is even smaller. Verizon is one of the top dividend stocks in the Dow, and should stay in the top two or three spots for some time, barring a catastrophic event.

Contrast that to Simon Property Group (SPG), a mall owner and the largest REIT by market capitalization. It's now priced to deliver a yield of only 3% on cash flow. That's totally insane for a company in a slow-growing (and highly cyclical) business. But since it's in a hot sector that Wall Street is in love with, most people are probably thinking that the 3% yield is just one more reason to buy. All I can say is, "Enjoy it while it lasts!"

So take a deep breath and look past the smoke and mirrors. Recent research shows verizon is dominating AT&T, and we could see a significant surge in VZ shares soon. What's more, if VZ and Vodafone (VOD) can reach a sensible deal to transfer the full ownership of their Verizon Wireless joint venture to Verizon, you can expect the market to assign a significantly higher P/E to Verizon shares. (We're talking a capital gain of maybe 15%-20% here.) And in case you forget, Apple's iPhone is coming to Verizon Wireless, so the wildly popular gadget is now a reason for VZ to cheer instead of groan.

I guess all that gets lost in the shuffle since it's not as sexy as calling the bottom in housing. I guess everybody wants to be the first to puff out their chest and claim they anticipated the housing recovery before anyone else. But there's a real danger of getting out of touch with reality in a race for the next hot sector or investing angle.

As of this writing, Jeff Reeves did not own shares in any of the stocks mentioned here.