# Verizon Communications Inc. (NYSE:VZ)

## Dividend Discount Model (DDM)

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Dividends are the cleanest and most straightforward measure of cash flow because these are clearly cash flows that go directly to the investor.

### Intrinsic Stock Value (Valuation Summary)

Verizon Communications Inc., dividends per share (DPS) forecast

US\$

Year Value DPSt or Terminal value (TVt) Calculation Present value at 6.55%
0 DPS01 2.47
1 DPS1 2.87 = 2.47 × (1 + 16.05%) 2.69
2 DPS2 3.23 = 2.87 × (1 + 12.52%) 2.84
3 DPS3 3.52 = 3.23 × (1 + 8.98%) 2.91
4 DPS4 3.71 = 3.52 × (1 + 5.44%) 2.88
5 DPS5 3.78 = 3.71 × (1 + 1.91%) 2.75
5 Terminal value (TV5) 82.97 = 3.78 × (1 + 1.91%) ÷ (6.55%1.91%) 60.41
Intrinsic value of Verizon Communications Inc.’s common stock (per share) \$74.49
Current share price \$54.26

Based on: 10-K (filing date: 2021-02-25).

1 DPS0 = Sum of the last year dividends per share of Verizon Communications Inc.’s common stock. See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 1.76% Expected rate of return on market portfolio2 E(RM) 11.84% Systematic risk of Verizon Communications Inc.’s common stock βVZ 0.48 Required rate of return on Verizon Communications Inc.’s common stock3 rVZ 6.55%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

3 rVZ = RF + βVZ [E(RM) – RF]
= 1.76% + 0.48 [11.84%1.76%]
= 6.55%

### Dividend Growth Rate (g)

#### Dividend growth rate (g) implied by PRAT model

Verizon Communications Inc., PRAT model

Average Dec 31, 2020 Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016
Selected Financial Data (US\$ in millions)
Dividends declared 10,284  10,070  9,853  9,525  9,314
Net income attributable to Verizon 17,801  19,265  15,528  30,101  13,127
Operating revenues 128,292  131,868  130,863  126,034  125,980
Total assets 316,481  291,727  264,829  257,143  244,180
Equity attributable to Verizon 67,842  61,395  53,145  43,096  22,524
Financial Ratios
Retention rate1 0.42 0.48 0.37 0.68 0.29
Profit margin2 13.88% 14.61% 11.87% 23.88% 10.42%
Asset turnover3 0.41 0.45 0.49 0.49 0.52
Financial leverage4 4.66 4.75 4.98 5.97 10.84
Averages
Retention rate 0.45
Profit margin 14.93%
Asset turnover 0.47
Financial leverage 5.09

Dividend growth rate (g)5 16.05%

Based on: 10-K (filing date: 2021-02-25), 10-K (filing date: 2020-02-21), 10-K (filing date: 2019-02-15), 10-K (filing date: 2018-02-23), 10-K (filing date: 2017-02-21).

2020 Calculations

1 Retention rate = (Net income attributable to Verizon – Dividends declared) ÷ Net income attributable to Verizon
= (17,80110,284) ÷ 17,801
= 0.42

2 Profit margin = 100 × Net income attributable to Verizon ÷ Operating revenues
= 100 × 17,801 ÷ 128,292
= 13.88%

3 Asset turnover = Operating revenues ÷ Total assets
= 128,292 ÷ 316,481
= 0.41

4 Financial leverage = Total assets ÷ Equity attributable to Verizon
= 316,481 ÷ 67,842
= 4.66

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.45 × 14.93% × 0.47 × 5.09
= 16.05%

#### Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$54.26 × 6.55%\$2.47) ÷ (\$54.26 + \$2.47)
= 1.91%

where:
P0 = current price of share of Verizon Communications Inc.’s common stock
D0 = the last year dividends per share of Verizon Communications Inc.’s common stock
r = required rate of return on Verizon Communications Inc.’s common stock

#### Dividend growth rate (g) forecast

Verizon Communications Inc., H-model

Year Value gt
1 g1 16.05%
2 g2 12.52%
3 g3 8.98%
4 g4 5.44%
5 and thereafter g5 1.91%

where:
g1 is implied by PRAT model
g5 is implied by Gordon growth model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 16.05% + (1.91%16.05%) × (2 – 1) ÷ (5 – 1)
= 12.52%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 16.05% + (1.91%16.05%) × (3 – 1) ÷ (5 – 1)
= 8.98%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 16.05% + (1.91%16.05%) × (4 – 1) ÷ (5 – 1)
= 5.44%