Risk and Return for Verizon Communications

To: Dr. Karen Lahey

From:

Subject: Fourth Memo – Risk and Return for your Firm and its Competitors

Date: April 23, 2011

I have compiled a report for Verizon Communications Inc. (VZ) that is going to study numerous financial metrics of the firm compared to major competitors, AT&T (T) and Sprint Nextel Corp. (S), over the three-year period, 2007-2009. In this report we are focusing on risk and return of these firms.

Lets start off with historical percentage rates of return and their components, capital gain and dividend yields. Percentage risk of return tells us how much more money we would have had if we invested in stocks at the beginning of the given year and sold the security at the end. Up to 2008 the dividend was growing slower than the stock price for all three companies: Verizon, AT&T and Sprint, which resulted in decline in Dividend Yield. Then, after the crisis hit, the Dividend Yield has been going up for VZ and T, being 0 for S, due to no dividend payouts. Crisis triggered significant slump in capital gain yield for VZ, T and S, with S stock doubling in 2009, giving it a 100% capital gain, VZ and T showed much more modest results over the years. Combining these two metrics, we have exactly same pattern for rate of return behavior for all three companies: negative numbers in 2008, positive growth up to 2010. S’s outrageous growth in rate of return in 2009 was pulled back to competition’s results in 2010.

Based on the breakdown of possible paths of future economy performance (20% for boom and recession, with remaining 60% for normal state), the expected rate of return for T is higher than for VZ, with S’s estimate being way higher, which seems reasonable based on historical experiences. Therefore, the 40% standard deviation for S doesn’t surprise us: the effect of future economic prognosis usually had a severe impact on S’s performance. Variance for S is 7 times higher than for T and VZ, explaining the uncertainty of...