Stock Analysis on Net

Verizon Communications Inc. (NYSE:VZ)

Present Value of Free Cash Flow to the Firm (FCFF)

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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 the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.


Intrinsic Stock Value (Valuation Summary)

Verizon Communications Inc., free cash flow to the firm (FCFF) forecast

US$ in millions, except per share data

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Year Value FCFFt or Terminal value (TVt) Calculation Present value at 6.28%
01 FCFF0 25,261
1 FCFF1 26,583 = 25,261 × (1 + 5.24%) 25,013
2 FCFF2 27,604 = 26,583 × (1 + 3.84%) 24,438
3 FCFF3 28,278 = 27,604 × (1 + 2.44%) 23,556
4 FCFF4 28,573 = 28,278 × (1 + 1.04%) 22,395
5 FCFF5 28,472 = 28,573 × (1 + -0.35%) 20,998
5 Terminal value (TV5) 427,788 = 28,472 × (1 + -0.35%) ÷ (6.28%-0.35%) 315,484
Intrinsic value of Verizon Communications Inc. capital 431,883
Less: Short- and long-term debt, including finance leases (fair value) 158,036
Intrinsic value of Verizon Communications Inc. common stock 273,847
 
Intrinsic value of Verizon Communications Inc. common stock (per share) $66.14
Current share price $53.50

Based on: 10-K (reporting date: 2020-12-31).

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.


Weighted Average Cost of Capital (WACC)

Verizon Communications Inc., cost of capital

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Value1 Weight Required rate of return2 Calculation
Equity (fair value) 221,499 0.58 6.63%
Short- and long-term debt, including finance leases (fair value) 158,036 0.42 5.80% = 7.69% × (1 – 24.64%)

Based on: 10-K (reporting date: 2020-12-31).

1 US$ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 4,140,163,896 × $53.50
= $221,498,768,436.00

   Short- and long-term debt, including finance leases (fair value). See details »

2 Required rate of return on equity is estimated by using CAPM. See details »

   Required rate of return on debt. See details »

   Required rate of return on debt is after tax.

   Estimated (average) effective income tax rate
= (23.40% + 13.00% + 18.30% + 33.30% + 35.20%) ÷ 5
= 24.64%

WACC = 6.28%


FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Verizon Communications Inc., PRAT model

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Average Dec 31, 2020 Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016
Selected Financial Data (US$ in millions)
Interest expense 4,247  4,730  4,833  4,733  4,376 
Net income attributable to Verizon 17,801  19,265  15,528  30,101  13,127 
 
Effective income tax rate (EITR)1 23.40% 13.00% 18.30% 33.30% 35.20%
 
Interest expense, after tax2 3,253  4,115  3,949  3,157  2,836 
Add: Dividends declared 10,284  10,070  9,853  9,525  9,314 
Interest expense (after tax) and dividends 13,537  14,185  13,802  12,682  12,150 
 
EBIT(1 – EITR)3 21,054  23,380  19,477  33,258  15,963 
 
Debt maturing within one year 5,889  10,777  7,190  3,453  2,645 
Long-term debt, excluding maturing within one year 123,173  100,712  105,873  113,642  105,433 
Equity attributable to Verizon 67,842  61,395  53,145  43,096  22,524 
Total capital 196,904  172,884  166,208  160,191  130,602 
Financial Ratios
Retention rate (RR)4 0.36 0.39 0.29 0.62 0.24
Return on invested capital (ROIC)5 10.69% 13.52% 11.72% 20.76% 12.22%
Averages
RR 0.38
ROIC 13.78%
 
FCFF growth rate (g)6 5.24%

Based on: 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31).

1 See details »

2020 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 4,247 × (1 – 23.40%)
= 3,253

3 EBIT(1 – EITR) = Net income attributable to Verizon + Interest expense, after tax
= 17,801 + 3,253
= 21,054

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [21,05413,537] ÷ 21,054
= 0.36

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 21,054 ÷ 196,904
= 10.69%

6 g = RR × ROIC
= 0.38 × 13.78%
= 5.24%


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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (379,535 × 6.28%25,261) ÷ (379,535 + 25,261)
= -0.35%

where:

Total capital, fair value0 = current fair value of Verizon Communications Inc. debt and equity (US$ in millions)
FCFF0 = the last year Verizon Communications Inc. free cash flow to the firm (US$ in millions)
WACC = weighted average cost of Verizon Communications Inc. capital


FCFF growth rate (g) forecast

Verizon Communications Inc., H-model

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Year Value gt
1 g1 5.24%
2 g2 3.84%
3 g3 2.44%
4 g4 1.04%
5 and thereafter g5 -0.35%

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)
= 5.24% + (-0.35%5.24%) × (2 – 1) ÷ (5 – 1)
= 3.84%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 5.24% + (-0.35%5.24%) × (3 – 1) ÷ (5 – 1)
= 2.44%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 5.24% + (-0.35%5.24%) × (4 – 1) ÷ (5 – 1)
= 1.04%