Stock Analysis on Net
Stock Analysis on Net

Verizon Communications Inc. (NYSE:VZ)

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

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 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

Microsoft Excel
Year Value FCFFt or Terminal value (TVt) Calculation Present value at 7.64%
01 FCFF0 22,923
1 FCFF1 23,596 = 22,923 × (1 + 2.94%) 21,922
2 FCFF2 24,140 = 23,596 × (1 + 2.31%) 20,836
3 FCFF3 24,544 = 24,140 × (1 + 1.67%) 19,681
4 FCFF4 24,798 = 24,544 × (1 + 1.04%) 18,474
5 FCFF5 24,899 = 24,798 × (1 + 0.41%) 17,233
5 Terminal value (TV5) 345,676 = 24,899 × (1 + 0.41%) ÷ (7.64% – 0.41%) 239,245
Intrinsic value of Verizon Communications Inc. capital 337,390
Less: Short-term and long-term debt, including finance leases (fair value) 139,365
Intrinsic value of Verizon Communications Inc. common stock 198,025
 
Intrinsic value of Verizon Communications Inc. common stock (per share) $47.04
Current share price $42.49

Based on: 10-K (reporting date: 2024-12-31).

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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

Microsoft Excel
Value1 Weight Required rate of return2 Calculation
Equity (fair value) 178,870 0.56 9.07%
Short-term and long-term debt, including finance leases (fair value) 139,365 0.44 5.79% = 7.63% × (1 – 24.06%)

Based on: 10-K (reporting date: 2024-12-31).

1 US$ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 4,209,703,958 × $42.49
= $178,870,321,175.42

   Short-term 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
= (21.90% + 28.80% + 23.10% + 23.10% + 23.40%) ÷ 5
= 24.06%

WACC = 7.64%

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Verizon Communications Inc., PRAT model

Microsoft Excel
Average Dec 31, 2024 Dec 31, 2023 Dec 31, 2022 Dec 31, 2021 Dec 31, 2020
Selected Financial Data (US$ in millions)
Interest expense 6,649 5,524 3,613 3,485 4,247
Net income attributable to Verizon 17,506 11,614 21,256 22,065 17,801
 
Effective income tax rate (EITR)1 21.90% 28.80% 23.10% 23.10% 23.40%
 
Interest expense, after tax2 5,193 3,933 2,778 2,680 3,253
Add: Dividends declared 11,306 11,082 10,860 10,532 10,284
Interest expense (after tax) and dividends 16,499 15,015 13,638 13,212 13,537
 
EBIT(1 – EITR)3 22,699 15,547 24,034 24,745 21,054
 
Debt maturing within one year 22,633 12,973 9,963 7,443 5,889
Long-term debt, excluding maturing within one year 121,381 137,701 140,676 143,425 123,173
Equity attributable to Verizon 99,237 92,430 91,144 81,790 67,842
Total capital 243,251 243,104 241,783 232,658 196,904
Financial Ratios
Retention rate (RR)4 0.27 0.03 0.43 0.47 0.36
Return on invested capital (ROIC)5 9.33% 6.40% 9.94% 10.64% 10.69%
Averages
RR 0.31
ROIC 9.40%
 
FCFF growth rate (g)6 2.94%

Based on: 10-K (reporting date: 2024-12-31), 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).

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2024 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 6,649 × (1 – 21.90%)
= 5,193

3 EBIT(1 – EITR) = Net income attributable to Verizon + Interest expense, after tax
= 17,506 + 5,193
= 22,699

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [22,699 – 16,499] ÷ 22,699
= 0.27

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 22,699 ÷ 243,251
= 9.33%

6 g = RR × ROIC
= 0.31 × 9.40%
= 2.94%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (318,235 × 7.64% – 22,923) ÷ (318,235 + 22,923)
= 0.41%

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

Microsoft Excel
Year Value gt
1 g1 2.94%
2 g2 2.31%
3 g3 1.67%
4 g4 1.04%
5 and thereafter g5 0.41%

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 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
= 2.94% + (0.41% – 2.94%) × (2 – 1) ÷ (5 – 1)
= 2.31%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 2.94% + (0.41% – 2.94%) × (3 – 1) ÷ (5 – 1)
= 1.67%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 2.94% + (0.41% – 2.94%) × (4 – 1) ÷ (5 – 1)
= 1.04%