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 7.30%
01 FCFF0 16,360
1 FCFF1 17,050 = 16,360 × (1 + 4.22%) 15,891
2 FCFF2 17,680 = 17,050 × (1 + 3.69%) 15,357
3 FCFF3 18,239 = 17,680 × (1 + 3.16%) 14,766
4 FCFF4 18,719 = 18,239 × (1 + 2.63%) 14,124
5 FCFF5 19,113 = 18,719 × (1 + 2.10%) 13,441
5 Terminal value (TV5) 375,971 = 19,113 × (1 + 2.10%) ÷ (7.30% – 2.10%) 264,391
Intrinsic value of Verizon Communications Inc. capital 337,969
Less: Short-term and long-term debt, including finance leases (fair value) 147,701
Intrinsic value of Verizon Communications Inc. common stock 190,268
 
Intrinsic value of Verizon Communications Inc. common stock (per share) $45.20
Current share price $41.36

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

1 See details »

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) 174,110 0.54 8.41%
Short-term and long-term debt, including finance leases (fair value) 147,701 0.46 5.98% = 7.70% × (1 – 22.28%)

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

1 US$ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 4,209,626,270 × $41.36
= $174,110,142,527.20

   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
= (28.80% + 23.10% + 23.10% + 23.40% + 13.00%) ÷ 5
= 22.28%

WACC = 7.30%

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Verizon Communications Inc., PRAT model

Microsoft Excel
Average Dec 31, 2023 Dec 31, 2022 Dec 31, 2021 Dec 31, 2020 Dec 31, 2019
Selected Financial Data (US$ in millions)
Interest expense 5,524 3,613 3,485 4,247 4,730
Net income attributable to Verizon 11,614 21,256 22,065 17,801 19,265
 
Effective income tax rate (EITR)1 28.80% 23.10% 23.10% 23.40% 13.00%
 
Interest expense, after tax2 3,933 2,778 2,680 3,253 4,115
Add: Dividends declared 11,082 10,860 10,532 10,284 10,070
Interest expense (after tax) and dividends 15,015 13,638 13,212 13,537 14,185
 
EBIT(1 – EITR)3 15,547 24,034 24,745 21,054 23,380
 
Debt maturing within one year 12,973 9,963 7,443 5,889 10,777
Long-term debt, excluding maturing within one year 137,701 140,676 143,425 123,173 100,712
Equity attributable to Verizon 92,430 91,144 81,790 67,842 61,395
Total capital 243,104 241,783 232,658 196,904 172,884
Financial Ratios
Retention rate (RR)4 0.03 0.43 0.47 0.36 0.39
Return on invested capital (ROIC)5 6.40% 9.94% 10.64% 10.69% 13.52%
Averages
RR 0.41
ROIC 10.24%
 
FCFF growth rate (g)6 4.22%

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).

1 See details »

2023 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 5,524 × (1 – 28.80%)
= 3,933

3 EBIT(1 – EITR) = Net income attributable to Verizon + Interest expense, after tax
= 11,614 + 3,933
= 15,547

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [15,547 – 15,015] ÷ 15,547
= 0.03

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 15,547 ÷ 243,104
= 6.40%

6 g = RR × ROIC
= 0.41 × 10.24%
= 4.22%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (321,811 × 7.30% – 16,360) ÷ (321,811 + 16,360)
= 2.10%

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 4.22%
2 g2 3.69%
3 g3 3.16%
4 g4 2.63%
5 and thereafter g5 2.10%

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)
= 4.22% + (2.10% – 4.22%) × (2 – 1) ÷ (5 – 1)
= 3.69%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 4.22% + (2.10% – 4.22%) × (3 – 1) ÷ (5 – 1)
= 3.16%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 4.22% + (2.10% – 4.22%) × (4 – 1) ÷ (5 – 1)
= 2.63%