New York City-based Verizon Communications Inc. (VZ) provides communications, information, and entertainment products and services to consumers, businesses, and governmental agencies. Its segments include Verizon Consumer Group and Verizon Business Group. In comparison, Armonk, N.Y.-based International Business Machines Corporation (IBM) is a technology company that operates in the cloud and cognitive software; global business services; systems; and global financing segments. It also designs advanced semiconductors in partnership with IBM research.
Since the beginning of the year, the benchmark stock market indexes have been correcting, driven by surging market volatility due to U.S.-Russia tensions over Ukraine, multiple interest rate hikes planned by the Fed, and multi-decade high inflation. Dividend-yielding stocks are often considered an efficient way to side-step market volatility because they offer regular income in the form of dividends in addition to capital appreciation.
Over the last three years, VZ’s dividend payout has grown at a 2% CAGR. Its four-year average dividend yield is 4.4%, and its current payout translates to a 4.7% yield. In comparison, IBM’s dividend payout has grown at a 2.2% CAGR over the last three years. Its four-year average dividend yield is 4.8%, and its current payout translates to a 5.4% yield.
VZ stock has gained 7.7% in price over the past three months, while IBM has gained 3.8%. However, in terms of past year performance, IBM is the clear winner with 5.2% gains versus VZ’s 3.2% decline.
Which is a better stock to buy now? Let’s find out.
Latest Developments
On Feb. 22, 2022, VZ agreed with Audi of America to bring 5G connectivity to the automaker’s U.S. lineup. The collaboration will enable 5G Ultra-Wideband connectivity in Audi vehicles, thereby providing the speed and telecommunication architecture necessary for highly personalized and augmented mobile services, new driver-assistance features, and connectivity-enabled innovations. The deal marks VZ's first agreement with a global premium automaker for 5G-enabled automobiles.
On Feb. 15, 2022, IBM announced that it had acquired Neudesic, a leading U.S. cloud services consultancy that specializes primarily in the Microsoft Azure platform and delivering services in multi-cloud. The acquisition will expand IBM’s hybrid multi-cloud services portfolio and advance its hybrid cloud and AI strategy.
Recent Financial Results
VZ’s revenues for its fiscal year 2021 increased 4.1% year-over-year to $133.61 billion. The company’s adjusted EBITDA increased 2.8% year-over-year to $48.38 billion. Also, its adjusted EPS came in at $1.31, representing an increase of 8.2% year-over-year.
IBM’s revenues for its fiscal fourth quarter ended Dec. 31, 2021, increased 6.5% year-over-year to $16.69 billion. The company’s non-GAAP net income increased 80% year-over-year to $3.03 billion. In addition, its non-GAAP EPS came in at $3.35, up 78.1% year-over-year.
Past and Expected Financial Performance
VZ’s revenue and total assets have grown at CAGRs of 0.7% and 11.5%, respectively, over the past three years. Analysts expect VZ’s revenue to increase 2.1% in the current year and 1.5% next year. The company’s EPS is expected to grow 1.7% in the current year and 2.6% next year. Also, its EPS is expected to grow at 2.8% per annum over the next five years.
In comparison, IBM’s total assets have risen at a 2.3% CAGR over the past three years. However, its revenues declined at a 10.4% CAGR over this period. The company’s revenue is expected to increase 5.9% in the current year and 3.8% next year. Its EPS is expected to grow 24.3% in the current year and 6.9% next year. Also, IBM’s EPS is expected to grow at 16.5% over the next five years.
Profitability
IBM’s 8.2% trailing-12- month levered FCF margin is higher than VZ’s negative levered FCF margin. However, VZ’s EBITDA margin and net income margin of 33.9% and 16.5%, respectively, compare with IBM’s 21.2% and 10%.
Valuation
In terms of forward non-GAAP PEG, VZ is currently trading at 2.69x, which is 268.5% higher than IBM’s 0.73x. And VZ’s 2.95x forward EV/Sales is 13.4% higher than IBM’s 2.60x.
POWR Ratings
VZ has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system. In contrast, IBM has an overall B rating, which equates to a Buy. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
IBM has a B grade for Value. The stock’s 2.60x forward EV/Sales is 24.7% lower than the 3.46x industry average, which is in sync with the Value grade. In comparison, VZ has a Value grade of C, which is in sync with its higher-than-industry 2.95 forward EV/Sales multiple.
Furthermore, VZ has a C grade for Quality. This is justified given its negative 23% levered FCF margin. In comparison, IBM’s trailing-12-month levered FCF margin of 8.2% is in sync with its Quality grade of B.
Among the 19 stocks in the Telecom – Domestic industry, VZ is ranked #9. However, IBM is ranked #18 out of 79 stocks in the Technology – Services industry.
Beyond what I’ve stated above, we have also rated the stocks for Growth, Momentum, Stability, and Sentiment. Click here to view all the VZ ratings. Also, get all the IBM ratings here.
The Winner
While both VZ and IBM can be considered good long-term investments considering their high-dividend yield and potential for capital appreciation, we think IBM is a better investment bet because of its lower valuations and better revenue and earnings growth prospects.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Telecom – Domestic industry here. Also, click here to access all the top-rated stocks in the Technology – Services industry.
VZ shares were trading at $54.32 per share on Wednesday afternoon, up $0.71 (+1.32%). Year-to-date, VZ has gained 5.80%, versus a -7.68% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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