Corporate Description of Verizon Financial Analysis

Corporate Description 

Verizon Communications Inc is a telecommunications company based in the United States of America. It deals with communication, information, and entertainment services and delivers them through two business segments; the consumer segment and business segment (Verizon Communications Inc, 2019) . The consumer segment provides wireless and wireline communication products and services to customers through retail and wholesale arrangements. Internet access and wireless devices such as tablets and smartphones are delivered across the US under the Verizon Wireless brand. According to the 2019 Annual Report, wireline services are provided in nine states in the USA through a fiber-optic network under Fios Brand, and a Copper-based system for areas not served by Fios. The business segment offers network services to large organizations and government customers across the globe. 

Verizon commands approximately 35% of the American telecommunication market than other tech companies in the US (Verizon Communications Inc, 2019) . The company serves both individual and business consumers through the two segments. Verizon has worked tirelessly to achieve its mission of delivering digital services through reliable networks and technology. These efforts and excellent customer relationships have earned the company a global presence. The company has also succeeded in smartphone market penetration through its exciting deals on physical and online markets. Research shows that about 100 million Americans connect to the Verizon network every day, indicating that the company has won the most significant share of the US network market ("Official Verizon Corporate Web site," 2020) . 

Verizon consumer group and Verizon business group are the two segments making up the company, which has continued to broaden its portfolio through acquisitions in the recent past . In June 2015, it acquired AOL at $50 per share. It also acquired Yahoo Company at $4.48 billion and merged them with AOL to form Oath in 2017 (Shaban, 2017) . The 2019 Annual report also shows that Verizon acquired NextLink and Straight Path. NextLink, a subsidiary of XO Holdings, was bought at $493 million in April 2017. Straight Path, a holder of wave spectrum meant for 5G network, was acquired at $184 per share in February 2018. Although Verizon is one of the largest telecommunication companies globally, it is exposed to inherent risks due to changing market conditions. The significant peril for Verizon is stiff competition from other tech companies such as AT&T Company ("Official Verizon Corporate Web site," 2020 ) . Technological innovations by the competitors have notably reduced the gap between Verizon and its rivals. Huge discounts and the adoption of unlimited data plans have also reduced Verizon's gross income . 

According to the 2019 annual report, Verizon faces market risk resulting from fluctuations in market prices and foreign exchange rate changes. The report also notes that Verizon is facing interest rate risk due to interest rate changes on its debt obligations. Verizon plans to counter the competition risk by developing new products and reforming ways of connecting with the customers. They also plan to work on cost efficiency and ensure flexibility to counteract the dynamic market trend. The 2019 report outlines that Verizon uses risk strategies such as swaps and interest caps to hedge against the market risk and interest rate risk. 

B. Income and Balance sheet trends 

In 2016, Verizon had current assets of $26.395 billion. The assets rose to $29.913 billion in 2017. The current assets further increased to $34.636 billion and $37.473 billion in 2018 and 2019, respectively. The increase in current assets implies that between 2016 and 2019, Verizon experienced a rise in existing assets by 41.97% ("Verizon Communications Annual Reports," 2020) . The surge is further an indication that Verizon is improving its liquidity levels. 

The Verizon total liabilities and equities have also been steadily rising, just like the assets have been on the rise. In 2015, Verizon had $244.180 billion liabilities. This amount increased to $291.727 billion in 2019, signifying a 19.47% rise in total liabilities and equities over the period. 

Over the period 2016-2019, the Verizon investments in unconsolidated businesses dropped from $1.110 billion in 2014 to 558 million in 2019. The long-term debts were 105.433 billion in 2014, $113.642 billion in 2015, $113.642 billion in 2016, $105.873 in 2018 and $100.712 billion in 2019 ("Annual Financials for Verizon Communications Inc.", 2019) . While Verizon has a significantly high long-term debt from the beginning, it has kept it steady and slowly reducing it over the years. 

Income Statement Trend Analysis 

Verizon 2015 total operating revenues were $131.620 billion. The revenues had declined to $125.98 billion in 2016 and 126.034 billion in 2017. The revenues climbed to $130.863 billion in 2018 and $131.868 billion in 2019. There was barely any change in revenues in the period 2015-2019. 

In 2015, Verizon had a net income of $18.375, and it dropped to $13.608 in 2016 before sharply rising to $30.55 billion in 2017 ("Annual Financials for Verizon Communications Inc.," 2019) . The net income declined again, sharply to $16.039 billion in 2018 and $19.788 billion in 2019. 

The operating expenses remained relatively the same over the years, not much difference; 2015 was $98.56 billion, 2016 $98.921 billion, 2017 was $98.620 billion, 2018 was $108.585 billion and $101.49 billion. These operating expenses are just too high when compared to the revenues that the company generated. Verizon has just too high operating expenses that it's into its revenues. 

C. Ratio Trend Analysis 

i. Liquidity ratios 

Current ratio Quick ratio Cash ratio 

2019; 0.84 2019; 0.80 2019; 0.06 

2018; 0.91 2018; 0.88 2018; 0.07 

2017; 0.91 2017; 0.87 2017;0.06 

The current ratio gives an insight into the efficiency of the operating cycle of a company and the ability of a company to generate cash from operations. An acceptable ratio varies from industry to industry, but an ideal current ratio ranges between 1 and 2.5 for financially healthy companies (H. Sherman, 2015) . Verizon recorded a marginal rise in the current ratio is 2018 but deteriorated in 2019 due to the drastic rise in the current liabilities. The performance of Verizon mirrors the industry's performance for the three years. The telecommunications industry's current ratio is below 1 of the three years ranging between 0.94 in 2017 to 0.80 in 2019. The quick ratio grew slightly in 2018 and declined significantly in 2019. The drop is attributed to a drop in cash and cash equivalents by 5.5per cent, and the current liabilities continued to increase. The portion of the long-term debt payable in 12 months rose by 3.6 billion, whereas other liabilities grew by 9.5per cent. Verizon's cash ratio follows a similar trend: the quick ratio, a marginal rise, and a drop in 2019. 

ii. Financial Leverage ratios 

Debt to total assets Debt to equity Equity ratio 

2019; 0.63 2019; 2.93 2019;0.22 

2018; 0.65 2018; 3.15 2018; 0.21 

2017; 0.70 2017; 4.02 2017; 0.17 

The total debt to total assets ratio has been on a declining trend since 2017. Verizon has increased its investment in assets over the years, which has contributed to the ratio decline. Total long-term liabilities declined in 2018 but increased drastically in 2019. The debt to equity ratio shows the gearing levels at Verizon are twice the amount on shareholders' equity for the three years, but the levels are on a decreasing trend. Higher gearing levels call for prudent management of resources due to the default risk attached to debt finance. Verizon has utilized the funds to acquire productive assets, as indicated by the revenue growth from 2017 to 2019. Equity ratio, on the other hand, shows the proportion of total assets financed through shareholders funds. The ratio has risen gradually through the years as total equity grows. Verizon is diversifying its funding of assets between debt finance and internal capital. 

iii. Asset management ratios 

Fixed asset turnover Inventory turnover Total asset turnover ratio 

2019; 1.43 2019; 22.34 2019; 0.45 

2018; 1.46 2018;24.09 2018; 0.49 

2017; 1.42 2017;29.90 2017; 0.49 

The fixed asset ratio rose steadily in 2018 before declining in 2019; it's a ratio that reflects levels of efficiency in the utilization of company assets to generate revenue. The inventory turnover ratio has declined considerably from 2017 to 2019. Inventories for Verizon primarily consist of wireless and related equipment. The sale has slowed down between 2018 and 2019 due to the prevalence of similar products in the market, presenting customers with wide diverse options for the equipment. The total asset turnover ratio retained a flat growth shape in 2018, declining in 2019, reflective of declining efficiency in utilizing assets. 

iv. Profitability ratios 

Net profit margin Return on total assets Return on sales 

2019; 15% 2019: 7% 2019; 15% 

2018; 10% 2018; 6% 2018: 12% 

2017; 24% 2017; 12% 2017; 24% 

Verizon has recorded a considerable drop in profitability in 2018, with a sharp rise in 2019. The decline could be attributed to a rise in operating expenses while the revenues registered a marginal growth of 4829million while operating expenses expanded by 9976 million in 2018.in 2019, the company streamlined its operations to record a reduction in operating expenses as the revenues grew (M.Wahlen et al., 2015) . Return on total assets ratio reduced in half in 2018, rising marginally in 2019. As the assets grew in 2018, profitability declined by 50per cent due to the delayed impact of the additional assets in the generation of revenues. However, efficiency in the utilization of total assets resulted in an improvement in the ratio is 2019 and increased revenues and profitability. The return on sales ratio follows a similar trend as the other profitability ratios. A decline by half in 2018 and then a slight improvement in 2019. The operational efficiency of the company has not been consistent as the ratio indicates; in 2017, the company retained 24 cents for every dollar worth of sales revenue, which declines to 12 cents and rising slightly to 15 cents in 2019.The ratio shows that for every dollar worth of sales revenue, more than 70per cent goes to a meeting for operational expenditure. 

v. Market Value ratios 

Earnings per share (diluted) Price-earnings ratio Dividends yield 

2019; 4.49 per share 2019; 12.78 2019; 4% 

2018; 3.62 per share 2018; 13.89 2018; 5% 

2017; 7.01 per share 2017: 6.38 2017; 5% 

Verizon's corporate value has been declining since 2017, albeit with a small improvement in 2019. The increased earnings reported in 2019 resulted in the improved value for each share as more profits are distributed to the company's stockholders. The 4.49per share value in 2019 is the highest in the industry exceeding key competitors such as AT&T, who had an EPS of 1.63. A company's price-earnings ratio shows what the investors are willing to pay for each share of the company relative to the earnings level. The ratio has doubled in value from 2017 to 2019 through the 2019 performance resulted in a decline in the ratio. An improved price-earnings ratio denotes investors' willingness to pay a higher price for each share of the company on the expectations of improved performance in the future ("Verizon Price to Book Ratio 2006-2020 | VZ", 2020) . Verizon has had a constant dividend yield in 2017 and 2018, declining by one percentage point in 2019. The company has largely maintained a similar dividend payout for the three years relative to the market price of its shares. 

D. Corporation and competitor comparison 

Verizon wireless major competitors are AT&T and T-Mobile. 

Stock Price 

Verizon 2019 share price was $59.45, 2018 share price was $52.23, 2017 share price was $46.94, 2016 share price was $42.20, 2015 share price was $37.40. 

AT&T share price in the year 2019 was $37.25, the 2018 share price was $25.59, the 2017 share price was $32.92, the 2016 share price was $31.15, and the 2015 share price was $26.40. 

T-Mobile share price in 2019 was $78.42, the 2018 share price was $63.61, the 2017 share price was $63.51, the 2016 share price was $57.51, and the 2015 share price was $39.12. 

T-Mobile commands a high share price compared to both AT&T and T-Mobile prices over the years. In 2015, Verizon almost had the same share price as T-Mobile, but over the period, T-Mobile shares have shot upwards much faster. 

Verizon stock price was at $37 in 2015; it has been steadily rising over the years, reaching a high of $59.45 in 2019. Between 2015 and 2019, Verizon stock price has increased by 22.05 or 37.09%. T-Mobile, on the other hand, had a 50.11% rise in its stock price during the period 2015-2019. AT&T, on the other, had a 29.12% rise in its stock price during the period 2015-2019. 

Earnings Per Share 

EPS is computed as a firm's profits divided by the outstanding shares of its common stock. The EPS indicates the level of profitability of the company. The higher the EPS, the more profitable the company is considered to be. EPS shows the amount of money a firm makes for every stock (M.Wahlen et al., 2015) . EPS is usually used to estimate the company's corporate value. Higher earnings per share show a higher price because the investors will pay more for the shares if they have the perception that the company has greater profits in regards to its share price. 

The EPS measurement is one of the most critical variables used to determine a share's price. EPS is also one of the primary elements used in the computation of the P/E (price-to-earnings) valuation ratio. By dividing the share price by EPS, one can see the stock value of the amount the market is willing to pay for every dollar. 

For the year 2019, Verizon EPS was $4.65, AT&T EPS for 2019 was $1.63, and T-Mobile 2019 EPS was $4.02 ("VZ Earnings per Share (Diluted) | Verizon Communications - GuruFocus.com," 2020) . The figures indicate that Verizon has the highest EPS of its three competitors, suggesting that it is more profitable and has a higher share value. 

PE Ratio 

The P/E ratio (price-earnings) associates a firm's share price to its EPS. A higher PE ratio implies that the stock price for the company is over-valued, or else the investors look forward to the higher growth of the stocks in the future. 

Verizon PE ratio for 2019 was 12.78; the 2018 P/E ratio was 13.88, and the 2017 PE ratio was 6.38. the AT&T PE ratio for the year 2019 was 19.71, its 2018 PE ratio was 8.98, and the AT&T 2017 PE ratio was 6.91. on the other hand, the T-Mobile 2019 PE ratio was 20.67, the 2018 PE ratio was 18.93, and the 2017 PE ratio was 12.21. 

From these historical PE ratios, it can be deduced that in 2019, T-Mobile reported the highest PE ratio at 20.67 of the three competitors. The high PE ratios for T-Mobile over the years be an indication that the stock prices are over-valued. However, it could not be entirely accurate because, for the three years under analysis, the T-Mobile PE ratios have remained higher, showing price stability. 

E. Capital structure Assessment 

i. Debt to equity ratio 

The debt to equity ratio has fluctuated from a high of 7.52 to a low of 2.93 times. Verizon has consistently maintained a high gearing level as compared to the equity finance levels. A key source of the internal funds is the retained earnings, which has grown steadily yearly from 15 billion in 2016 to 53 billion in 2019. The capital structure reveals debt levels of at least two times the level of internal funds for the five years under review. 

ii. Evaluation of Verizon's Beta 

Beta evaluate the volatility of a company's stock price about the market. Verizon has a beta of 0.43, which is less than one, implies that the stock price is not as volatile as the market movements, thus less risky ("Verizon Communications Inc. (VZ)," 2020) . 

iii. Weighted average cost of capital 

Security market line approach and the dividend growth model 

The security market line (SML) approach is determined as follows; the risk-free rate of return + Beta of the company (Market return – risk-free return) 

The risk-free rate of return = the price of a 90-day treasury bill issued by the US government as of September 22, 2020, is 0.10%. Source: ("Daily Treasury Bill Rates Data," 2020) 

Market return = 7.1% 

SML = 0.10% + 0.43(7.1% - 0.10%) = 3.11% 

WACC = 3.11% 

Dividend growth model; 

WACC through the dividend growth model is determined as follows; 

Re = (D0*(1 + g) / P0) + g 

Do(1+g) is the dividend expected in the next payment period 

G is the growth rate in dividends 

Po is the current market price 

Average growth rate (See excel calculation) = 2% 

D0(1+g) = 2.49 

Current market price = $58.91 

Re = (2.49/58.91) + 2% = 2.04% 

WACC = 2.04% 

The WACC computed through the SML is lower than one computed through the dividend growth model. The security market line has a key advantage in the ease of use. It's relatively easier to determine and considers systematic risk, which reflects a reality of the market conditions since investors hold diversified portfolios. It provides a better approach to determining WACC than the dividend growth model since it considers the systematic risk. However, the model assumes that borrowing can be done at a risk-free rate of return, which is an unrealistic proposition. Moreover, it is difficult to determine the market premium as the figure must be assigned to the risk-free rate of return. 

The most common method used in determining WACC and, thus, easier to understand, is the dividend growth model. The model fixes values to company stocks without considering prevailing market conditions, thus making it easier to make company comparisons (Tarver, 2015) . Likewise, the model has its shortcomings, including other factors not related to dividends like brand loyalty. Also, the accuracy of the model has a significant reliance on the stableness of a company's dividends. 

F. Cash Flow Assessment 

In the financial year 2015, Verizon used $30.043 billion in investing activities. The number declined to $10.983 billion in 2016 and $19.372 billion in 2017. The investing activities cash flow continued to drop in 2016 to $9.874 before starting to rise again in 2017 to $18.456 billion and $17.934 billion in 2018 and $17,581 billion. 

The net cash used in investing activities was $13.376 billion in 2016. The amount dropped to $6.151 billion in 2017 and rose again to $15.377 billion in 2018. The 2019 net cash used in financing activities was $18.164. 

The cash and cash equivalents at the end of the financial year 2016 were $3.177 billion, in 2017 the cash and cash equivalents were $2.888 billion, and in 2017, it was $3.916 billion. The 2019 cash and cash equivalents were $3.917 billion. These seem to be sufficient enough cash to keep the business operational and fully functional throughout the year and should an emergency arise. 

Verizon has been paying dividends every year to indicate a profitable entity that gives back value to the shareholders. In 2017, Verizon paid out dividends of $9.472 billion. The amount paid out as dividends increased to $9.772 billion and $10.016 billion in 2018 and 2019. 

The inventories are also highly indicative. There are significantly low levels of lists over the years. The inventories seem to be dwindling over the years, with 168 million worth of inventories I stocked in 2017. The inventories drop to a negative value in both 2019 and 2018. 

G. Conclusion 

Verizon has recorded an increase in sales revenues for the last few years, with the company laying a lot of emphasis on the rollout of the 5G network to cement its positions in the market as the leading network. The company is reliant on the 5G network amidst the market prevalence of the spectrum is a big challenge, according to market analysts at investors.com. The analysts view the acquisitions of Yahoo and AOL was not a productive move since the company made a write-down of the Oath business, worth 4.6 billion in 2018. Meanwhile, its competitors were making productive strategic acquisitions (Krause, 2020) . The purchase of Sprint by T-Mobile created a strong rival to Verizon and AT&T, especially in the offering of a 5G network. Investors.com analysts maintain that Verizon is a defensive stock that pays a high dividend whose future success depends on a successful launch of 5G services. Verizon's revenue growth remains a concern to the investors as the Wireless market draws more than 85 percent of its sales hit saturation point and must expand the service to more cities in the US to grow revenue base. "On the buy or hold the opinion," investors.com analysts strike a neutral position, not a buy and not sell stock despite the good dividends paid by Verizon. 

The analysts have provided an objective review of Verizon and agree with their sentiments on revenue growth issues, massive investment in 5G, which must be optimized to grow revenues. Also, the company is helping in restating its credit position by continuing to retire large portions of the long-term loans, which will ease its gearing levels and restore creditworthiness. However, advice on not buying the stocks contradicts my opinion, which was a buy and holds the market position for Verizon stock due to its strong fundamentals in profitability, and dividend yields, and return on equity. In these critical areas, the company performed better than its industry rivals, and there is no significant threat in its ability to continue paying a high dividend to investors. 

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