Stock Analysis on Net

Verizon Communications Inc. (NYSE:VZ)

Present Value of Free Cash Flow to Equity (FCFE) 

Microsoft Excel

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company asset base.


Intrinsic Stock Value (Valuation Summary)

Verizon Communications Inc., free cash flow to equity (FCFE) forecast

US$ in millions, except per share data

Microsoft Excel
Year Value FCFEt or Terminal value (TVt) Calculation Present value at 8.17%
01 FCFE0 10,677
1 FCFE1 11,762 = 10,677 × (1 + 10.17%) 10,874
2 FCFE2 12,711 = 11,762 × (1 + 8.06%) 10,862
3 FCFE3 13,468 = 12,711 × (1 + 5.96%) 10,640
4 FCFE4 13,987 = 13,468 × (1 + 3.85%) 10,214
5 FCFE5 14,231 = 13,987 × (1 + 1.75%) 9,607
5 Terminal value (TV5) 225,267 = 14,231 × (1 + 1.75%) ÷ (8.17%1.75%) 152,082
Intrinsic value of Verizon Communications Inc. common stock 204,279
 
Intrinsic value of Verizon Communications Inc. common stock (per share) $48.59
Current share price $40.20

Based on: 10-K (reporting date: 2023-12-31).

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)

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Assumptions
Rate of return on LT Treasury Composite1 RF 4.43%
Expected rate of return on market portfolio2 E(RM) 13.55%
Systematic risk of Verizon Communications Inc. common stock βVZ 0.41
 
Required rate of return on Verizon Communications Inc. common stock3 rVZ 8.17%

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).

2 See details »

3 rVZ = RF + βVZ [E(RM) – RF]
= 4.43% + 0.41 [13.55%4.43%]
= 8.17%


FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Verizon Communications Inc., PRAT model

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Average Dec 31, 2023 Dec 31, 2022 Dec 31, 2021 Dec 31, 2020 Dec 31, 2019
Selected Financial Data (US$ in millions)
Dividends declared 11,082 10,860 10,532 10,284 10,070
Net income attributable to Verizon 11,614 21,256 22,065 17,801 19,265
Operating revenues 133,974 136,835 133,613 128,292 131,868
Total assets 380,255 379,680 366,596 316,481 291,727
Equity attributable to Verizon 92,430 91,144 81,790 67,842 61,395
Financial Ratios
Retention rate1 0.05 0.49 0.52 0.42 0.48
Profit margin2 8.67% 15.53% 16.51% 13.88% 14.61%
Asset turnover3 0.35 0.36 0.36 0.41 0.45
Financial leverage4 4.11 4.17 4.48 4.66 4.75
Averages
Retention rate 0.39
Profit margin 15.13%
Asset turnover 0.39
Financial leverage 4.44
 
FCFE growth rate (g)5 10.17%

Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).

2023 Calculations

1 Retention rate = (Net income attributable to Verizon – Dividends declared) ÷ Net income attributable to Verizon
= (11,61411,082) ÷ 11,614
= 0.05

2 Profit margin = 100 × Net income attributable to Verizon ÷ Operating revenues
= 100 × 11,614 ÷ 133,974
= 8.67%

3 Asset turnover = Operating revenues ÷ Total assets
= 133,974 ÷ 380,255
= 0.35

4 Financial leverage = Total assets ÷ Equity attributable to Verizon
= 380,255 ÷ 92,430
= 4.11

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.39 × 15.13% × 0.39 × 4.44
= 10.17%


FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (169,012 × 8.17%10,677) ÷ (169,012 + 10,677)
= 1.75%

where:
Equity market value0 = current market value of Verizon Communications Inc. common stock (US$ in millions)
FCFE0 = the last year Verizon Communications Inc. free cash flow to equity (US$ in millions)
r = required rate of return on Verizon Communications Inc. common stock


FCFE growth rate (g) forecast

Verizon Communications Inc., H-model

Microsoft Excel
Year Value gt
1 g1 10.17%
2 g2 8.06%
3 g3 5.96%
4 g4 3.85%
5 and thereafter g5 1.75%

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

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 10.17% + (1.75%10.17%) × (2 – 1) ÷ (5 – 1)
= 8.06%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 10.17% + (1.75%10.17%) × (3 – 1) ÷ (5 – 1)
= 5.96%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 10.17% + (1.75%10.17%) × (4 – 1) ÷ (5 – 1)
= 3.85%