5 Reasons to Buy Verizon

Dividend investors that were drawn to Verizon’s [[VZ]] high dividend yield earlier this year have experienced a painful first half of the year. VZ shares have dropped 15% since the beginning of the year and the falling stock price has pushed their yield to 6.8%. In fact, Verizon now is the highest yielding stock in the Dow Jones index.

 

We had warned investors in early February that Verizon and fellow telecom giant AT&T [[T]] were definitely not the best dividend stocks in the Dow (despite their high yields).

 

At the time we pointed dividend investors to DuPont [[DD]], Chevron [[CVX]] and Intel [[INTC]] as better picks that Verizon and AT&T. Those picks have done fairly well, with DuPont and Intel handily beating the Dow’s performance this year. Chevron was performing well before the Gulf oil disaster derailed pretty much every stock in the energy sector.

 

As we near the end of July it’s time to reassess our view of Verizon. Recent events have actually made us very bullish on the stock and we would expect Verizon to outperform the Dow index in the second half of 2010 and into 2011.

 

Here are 5 reasons to buy Verizon stock:

 

1. Verizon just reported second quarter earnings results that were $.02 above Wall Street’s estimates. It had been several quarters since VZ had delivered such a solid earnings beat.

 

Verizon added 1.4 million customers in the second quarter and customer churn of only 0.94% (significantly lower than AT&T’s 1.24%). Cash flow, the key to dividend stocks, jumped 29% to $9.8 billion in the second quarter. The company’s revenue growth also outpaced AT&T.

 

2. In addition to the spectacular quarterly results, Bloomberg recently reported that Verizon could begin selling the very popular Apple [[AAPL]] iPhone as early as January 2011. AT&T has been the exclusive provider for Apple since the iPhone launched in 2007 and last quarter they activated 3.2 million iPhones. With Verizon’s superior network, analysts expect that they should be able to match those numbers.

 

3. Verizon’s dividend yield has climbed from 5.7% at the beginning of the year to its current 6.8% yield. The telecom giant is expected to increase their dividend again in September. Investors are likely to see only a single-digit increase, but a bigger dividend is always appreciated.

 

4. Following the strong second quarter results, Wall Street now expects Verizon to earn $2.24 per share in 2011. That’s only 3% growth, but those numbers could prove quite conservative if Verizon is able to start selling the iPhone next year. Even based on current assumptions, Verizon trades at a relatively cheap 12x consensus 2011 earnings estimates.

 

5. Earlier this month, even Mad Money host Jim Cramer recommended Verizon stock to his viewers. He pointed out that only 17% of Verizon subscribers own smartphones leaving significant opportunity for growth in the next few years.

 

We believe these five factors provide compelling reasons to buy Verizon stock now. Investors can capture their amazing dividend yield plus there is opportunity to capitalize on further upside if the iPhone rumors prove to be true.

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