Verizon Communications Inc. (VZ) Company

Determine the most recent stock price and the total dividends paid over the past year.

According to Yahoo! Finance (n.d.), the stock price for Verizon Communications Inc. was 37.72 USD as of 1st November 2022. The annual common stock dividends paid for 2021 were $-10.445B, a 2.08% increase from 2020, and came in at $0.64/share.

Calculate the current dividend yield on the stock. Show your calculations of the dividend yield and required rate of return (Ke), and present the P/E ratio. Calculate the required rate of return (Ke) for an investment in the common stock. Identify the current P/E ratio for the company from a source such as Yahoo! Finance or Barron’s.

Current Dividend Yield on the stock = Annual Dividends / Share Price

($0.64 * 4 quarters = $2.56) $2.56 / $37.72 = 6.79%

The required rate of return = First Year Dividend / Common Stock Price + Growth Rate

$0.64 / $37.72 + 6.9% = 6.92% (Assuming a growth rate of 6.9% per Nasdaq (n.d.)).

Therefore, the required rate of return for Verizon’s common stock would be 6.92%.

The current P/E ratio for Verizon, according to Yahoo! Finance (n.d), is 8.17.

Explain the relationship between your chosen company’s Ke and P/E ratio and what that relationship indicates about the risk of the company’s future cash flows.

The comparison of the rate of return and the price-earnings ratio indicates the risk of the firm’s future cash flow by foreshadowing any future sales growth. Sales growth and earnings heavily impact the price-earnings ratio. We can see that the required rate of return over the past two years has been almost the same according to Yahoo! Finance, and the P/E ratio compared to industry leaders is relatively low. For instance, Alphabet Inc has 18.36 while Meta Platforms Inc has 9. It could mean the firm stock is undervalued and, therefore, could attract a lot of investors in the future.

Explain whether the general relationship between a high Ke and a low P/E ratio (or low Ke and high P/E ratio) is supported by the data for your chosen publicly traded company.

The relationship between Verizon’s rate of return and price-earnings ratio reveals the commonality of low to low. A low return follows a low P/E ratio. The opposite outcome from these ratios is not supported by Verizon’s data.

Predict the impact on the company’s stock price based on your forecast that the company will grow its dividends by a rate higher than 5%.

If the firm grows the dividend by a rate higher than 5%, the impact on the company’s stock price would be massive, it would indicate a rapidly growing company.

Compare your company’s P/E ratio with the P/E ratios of two other companies in its industry.

AT&T’s PE ratio as of October 31, 2022, is 6.42 (Macrotrends, n.d.).

The T-mobile P/E ratio is 124.98 (Ycharts, n.d.)

The current P/E ratio for Verizon, according to Yahoo! Finance (n.d), is 8.17.

A higher P/E ratio shows that investors are willing to pay a higher share price today because of growth expectations in the future. If we compare the three companies, T-mobile seems to be performing better than Verizon and AT&T. However, Verizon is at a better position than AT&T with a relatively higher ratio indicating growth potential.

Hypothesize which company in this industry should have the lowest Ke based on the P/E comparisons.

I believe that AT&T should have the lowest rate of return because a low P/E ratio is associated with a low rate of return. AT&T has the lowest P/E ratio among the three companies, so it has the lowest rate of return among them.

Summarize the connection between a company’s growth rate, its required rate of return, and its value (stock price).

The required rate of return is inversely proportional to the value of the stock. A higher rate of return leads to discounting at a higher rate hence the low value of the stock. Thus, a change in the required rate of return would impact the real stock value. The growth rate is directly proportional to the stock value. That is, a higher growth rate leads to a higher stock price.

References

Macrotrends. (n.d.). AT&T PE Ratio 2006-2020 | T. Www.macrotrends.net. https://www.macrotrends.net/stocks/charts/T/at-t/pe-ratio

Nasdaq. (n.d.). Verizon Communications Inc. Common Stock (VZ) Dividend History. Www.nasdaq.com. https://www.nasdaq.com/market-activity/stocks/vz/dividend-history

Yahoo! Finance. (n.d.). Verizon Communications Inc. (VZ) Stock Price, Quote, History & News – Yahoo Finance. Finance.yahoo.com. https://finance.yahoo.com/quote/VZ/

Ycharts. (n.d.). T-Mobile US PE Ratio. Ycharts.com. Retrieved November 1, 2022, from https://ycharts.com/companies/TMUS/pe_ratio