Verizon: Tough to Pass Up Dividend and Modest Growth in This Economy

Posted Jun 30th 2010 3:00PM by Joseph Lazzaro
Filed under: Verizon Communications (VZ), Stocks to Buy

Shares of Verizon Communications (VZ), first discussed here on February 12, 2009, at a price of $29.86, have pulled-back in the first half of 2010, but just view the aforementioned as a chance to pick up a quality telecom play at a decent price.

Look for VZ to post 3% to 5% revenue growth in 2010 and 2011, with data services being the key revenue increase driver. VZ's cell phone subscriber additions should also lead the sector, but competition may hurt overall subscription prices.

Meanwhile, landline subscribers will continue to erode, due to technological change, but that's not nearly enough to negate the superior safety/growth story. A rock-solid $1.90 annual dividend adds to the positive mix.

The First Call FY2010/FY2011 EPS estimates for VZ are $2.22 to $2.31. Each EPS estimate looks about 5% low, according to my analysis.

Technically, the selling in Verizon's shares appears to be over, with the stock likely having formed a bottom at/near $27. Further, the six-month move south normally would represent a reg flag, but Verizon's sector experience gets the benefit of the doubt here.

2010 Outlook: I view Verizon as a long-term play, but if investors are looking to sell VZ within the year, it's probably best to take your profits after it rises to $33-34, if it fails to rise above $35.

Stock Analysis: I consider Verizon Communications to be a moderate-risk stock. If an investor has already purchased the company's shares, I'd hold them. If not, I'd consider buying a 50% position in VZ now; then buy another 25% in one month, if U.S. economic conditions don't worsen substantially. Under any circumstance, I wouldn't buy more than 75% of my VZ position before September 2010 and I'd put a sell/stop loss at $18.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.