(NYSE: VZ)

VERIZON COMMUNICATIONS

(NYSE: VZ)

April 21, 2016 Earnings Results

Stock Focus List Canadian Equity Buy List Equity Income Buy List

Rating

BUY

Investment Category

Growth & Income

Sector

Communications

Recommended Sector Weight

3%

Subsector

Telecom & Cable

Price Movement

Below Average

Price

$50.39

Company Overview

Verizon operates the largest wireless and second-largest wireline telecom networks in the U.S. Based in New York, N.Y., it was incorporated in 2000.

Revenues International

3%

Valuation & Earnings 52-Week Range Market Cap. LT EPS Growth Estimate Est. Earnings Date

$54.49 ? $38.06 205.6bn. 7%

July 21, 2016

Earnings P/E PEGY

FY2015A FY2016E FY2017E

3.99

3.99

4.18

12.6x 1.1x

12.6x 1.1x

12.1x 1.0x

Dividends & Income

Dividend Outlook (1-Year)

Rising

Dividend/Yield LT Dividend Growth Estimate 5-Yr. Trailing Growth

$2.26/4.5% 3% 3%

Last Change

3% / Sep 3, 2015

Paid Since

1984

Consecutive Years Increased

9

Payout Ratio ('16 Est. EPS)

57%

Dividends Paid

Feb, May, Aug, Nov

Debt Ratings Standard & Poor's/Moody's

BBB+ /Baa2

INVESTMENT SUMMARY

We rate Verizon Communications a Buy because shares have corrected over the past year and we feel positive about the purchase of Vodafone's 45% ownership in Verizon Wireless. Verizon shares appear attractive at this level when taking into account our estimated earnings per share growth now that the transaction has closed.

Verizon Wireless Generates Strong Cash Flow and Growth Currently, Verizon Wireless (VZW) provides the majority of Verizon's free cash flow and earnings. VZW generates high margins and has strong customer loyalty. We believe that VZW can continue growing as additional customers adopt wireless data services and increase usage, moving them into higher-priced usage tiers. Now that Verizon has taken full ownership of VZW, we anticipate an even higher contribution to earnings per share.

Verizon Building Stronger Wireless Network VZW's network is often considered to be the best in the country. The company built its network using Code Division Multiple Access (CDMA) technology, which is known for strong signal quality and lower capital intensity since fewer cell sites are needed to serve a given geographic area. VZW has acquired additional wireless spectrum from several cable operators, which will improve capacity available for wireless data services.

Verizon's Wireline Business Has Room to Improve Operating margins in the traditional wireline business have been severely compressed since investing in the FiOS network. Since VZ has now completed most of its spending on FiOS, it should be able to start leveraging the investment and deliver margin improvements. The current situation means that Verizon's dividend is mostly funded and supported by the cash generated from VZW.

Moderate Dividend Growth Likely We believe future dividend growth will be moderate (3% - 4% annually) due to the need to pay down debt after the acquisition of Vodafone's 45% ownership in Verizon Wireless.

Analyst

Q1

Q2

David Heger, CFA

1 Year Price History for VZ

Q3

Q1

Created by BlueMatrix

2016

56 52 48 44 40 36 Q2

Valuation Verizon shares appear attractive as they are currently trading at around 13 times our 2016 earnings per share estimate. This multiple is below a peer group of companies that is trading at about 15 times 2016 earnings estimates and a similar five-year average price/earnings multiple for Verizon.

Risks Downside risks include a lack of improvement in the wireline business, slowing growth in the wireless market, competition, the impact of wireless handset subsidies on margins, heavy capital spending, regulatory risks, large pension and retirement obligations, and the impact of rising interest rates on telecom shares.

Please see important disclosure information on page 4 of this report.

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April 21 2016

VERIZON COMMUNICATIONS (NYSE: VZ)

RECENT NEWS AND ANALYSIS

4/21/16: Verizon's first-quarter revenue was below the consensus estimate, and earnings per share were in line with the consensus. Low wireless revenue caused the revenue shortfall as the company continues to feel the impact of customers migrating to handset installment plans. This transition reduces wireless service revenue, which is partially offset by wireless equipment revenue. Wireless subscriber additions were better than anticipated, and wireless customer retention was strong. Wireline revenue was in line with expectations, while tight cost management enabled better-than-expected wireline operating profit but slowing Fios customer additions.

We expect Verizon to face revenue headwinds in its wireless business through 2016 as customers increasingly adopt handset installment plans. We are encouraged that Verizon delivered strong wireless customer additions and customer retention. The company will need to tightly manage costs, however, as it faces the wireless revenue headwind and loses the profit contribution from the wireline properties that were sold to Frontier Communications on April 1. Also, the company warned the second-quarter earnings will be pressured due to the current wireline strike delaying cost-reduction initiatives, but it maintained full-year earnings expectations. We are maintaining our Buy rating on Verizon because we believe that shares are trading at a discount to fair value during the current wireless transition.

4/13/16: Verizon's union workers in its wireline business have gone on strike. Roughly 36,000 workers walked off the job because the Communications Workers of America (CWA) and the International Brotherhood of Electrical Workers (IBEW) have not been able to reach agreeable terms with management on a new labor contract. The contract expired in August 2015, but workers have remained on the job while negotiations continued. The unions have not been able to reach a compromise with Verizon regarding the offshoring of call-center jobs and changes to pension benefits.

A relatively short strike would likely not have a significant impact on Verizon's results because other Verizon employees have been trained to fill in for the union members to keep the network functioning. A longer strike could negatively impact revenue due to prolonged installation times for newly ordered services, but earnings would not be as significantly impacted due to lower labor costs while striking workers are not paid. Verizon's most recent strike, which was in 2011, lasted for 15 days. We anticipate that a potential strike will be relatively short and will have minimal impact on earnings.

4/7/16: Bloomberg News reported that Verizon is among several companies that may bid to acquire some or all of Yahoo's assets. Verizon may also be willing to acquire Yahoo Japan as a means of assuring that the offer is successful. Verizon could then either sell the Yahoo Japan stake or distribute it to shareholders. Combining Yahoo's

Web business with Verizon's AOL operations could make strategic sense, offering AOL a larger presence in mobile and Web advertising. Our primary concern is that Yahoo's revenue continues to decline and whether AOL's CEO Tim Armstrong could successfully turn around Yahoo to the same degree he has turned around AOL. Also, even with AOL and Yahoo, Verizon would have a much smaller share in the mobile ad market than Facebook and Alphabet (Google). We do not assume a potential Yahoo acquisition in our valuation of Verizon shares, but we believe that it would not have a significantly negative impact on Verizon's near-term earnings.

COMPANY OUTLOOK

Verizon has transitioned itself to be a company focused on growth. Through a series of transactions, Verizon has reduced its exposure to traditional wireline voice telephone services and rural markets to one focused more closely on wireless, data and video services. We expect the company to generate 80% or more of its future revenues from these growth areas. VZ has delivered stronger revenue and earnings growth than some other telecom services companies in recent quarters, primarily due to the strength of its wireless operations. This growth will likely slow over time as the year-over-year revenue comparisons are more difficult.

Wireless data opportunities are expanding. About 70% of Verizon Wireless postpaid subscribers are using smartphones; therefore, the company still has an incremental penetration opportunity for wireless data services. Typically, as customers start using data services via smartphones, they rapidly increase their usage. VZ recently announced a new tiered pricing model, which replaces previous plans that allowed unlimited data usage. In turn, average revenue per user should increase as customers move up to higher-priced tiers. In addition, VZ is still in the process of rolling out even higher data speeds on its fourth-generation (4G) network. Customer migration to 4G should further drive increased usage and increased revenue per user.

Opportunity for profit margin improvement in the core wireline business ? VZ's operating margins in its traditional wireline business have been severely compressed since investing in its FiOS network. Since VZ has now completed the bulk of its investment in the FiOS network, the company should be able to start leveraging the investment and deliver margin improvements. Wireline operating profit margins have only been around 1% in recent years as opposed to AT&T, which has posted wireline operating profit margins in the 10%-12% range. VZ is also considering the migration of all of its remaining copper-based services onto its fiber-optic network due to the potential cost savings.

Verizon has significant pension and other benefit obligations. Verizon has significant pension and post-retirement obligations that are not included in its consolidated financials. In 2014, Verizon's pension was

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April 21 2016

$6.8 billion underfunded, and its post-retirement benefits were $24.7 billion underfunded. We include VZ's pension and other obligations in our valuation analysis.

INDUSTRY OUTLOOK

We have a mixed view of the communications industry. Large capital spending and increasing competition due to technological and regulatory change tend to balance the strong cash flows and recurring revenues that characterize this industry.

Intense competition, regulatory risk, and large amounts of capital spending are chief concerns.

Intense Competition ? Technology has increased the competition for telephone services in the past two decades. Traditional home phone service is threatened with wireless substitution, cable telephone services, and Voice-over-the-Internet (VoIP) providers. Similarly, cable companies face competition from Internet video distribution (such as Hulu and Netflix), satellite television and also TV offerings from traditional telecom companies.

Significant Investments Required to Remain Competitive ? Due to competitive threats and the need to address wireless and data growth, communications companies spend heavily on capital improvements to grow and enhance their networks. AT&T, Verizon and Sprint are the largest wireless providers in the U.S. and on average, spend 15% of annual revenues on capital investment.

Regulatory risk is always a concern - The communications industry is highly regulated. Changes in laws or regulations could result in surprising upside or downside to companies in this industry. Some particular issues include "Net Neutrality," rural subsidies and market concentration. Challenges in the wireless business include FCC policy regarding spectrum auctions and Verizon's ability to acquire spectrum via M&A transactions.

The communications industry has good growth potential in wireless, data and video services.

Wireless Growth Continues ? We estimate U.S. wireless adoption at 104% of the population. The adoption rate provides a convenient way to monitor industry growth, but it increasingly refers to wireless devices rather than customers. For instance, a single person can own a tablet computer, a cell phone and a wireless data card for Internet access. That person then represents three "subscribers" as a result of these devices. Due to this double and triple counting, the U.S. exceeds 100% adoption, and we expect adoption to grow even more in the future.

Data Growth ? All communication is quickly becoming data communication. Video traffic is particularly data intensive and requires large amounts of capacity and high speeds to work effectively. It has been estimated that Netflix alone accounts for 30% of peak Internet traffic due to its movie download service. The increasing use of the

VERIZON COMMUNICATIONS (NYSE: VZ)

Internet for video and other entertainment is likely to result in continued data growth, in our opinion.

Video Growth ? We believe video revenues will be an important driver of growth within the communications industry. Traditional cable operators benefit by selling new services such as video-on-demand and high definition programming, while traditional telecom operators benefit by entering this large market and taking market share.

FINANCIAL POSITION

We believe Verizon's financial position is stable. Consolidated debt levels have increased to 2.4 times earnings before interest, taxes, depreciation and amortization (EBITDA) following the acquisition of Vodafone's ownership in Verizon Wireless. Verizon should, however, be able pay down debt to the pre-transaction level by 2019 due to strong wireless free cash flow. We view this debt level as manageable considering this cash flow outlook.

Dividend Outlook - Verizon currently pays a $2.26 annual dividend, which represents 57% of estimated 2016 earnings. Over the past five years, Verizon has grown its dividend about 3% per year on average. We estimate future dividend growth of roughly 3% because we anticipate the company will focus on using free cash flow to pay down debt following the Vodafone transaction.

PORTFOLIO CONSIDERATIONS

Verizon, a large-cap company that pays a dividend, is in the Growth & Income Investment Category. Verizon is part of the Communications sector, where we recommend holding 3% of equity portfolios, and in the Telecom & Cable subsector. Given the large overlap within Telecom & Cable companies' business models, we suggest diversifying within this smaller, defensive sector based on the investment category, price movement and income needs of the portfolio.

Verizon shares have Below-Average price movements, both up and down relative to the market, due to the relative stability of its earnings as one of the largest U.S. telecom providers. Telecom & Cable companies have historically been less sensitive to the health of the economy relative to other Communications subsectors.

RECENT STOCK PERFORMANCE

Annualized Total Returns 1Yr

3Yrs

VERIZON COMMUNICATIONS S&P Telecom Services S&P 500 Index

13%

15% (1)%

8%

8% 12%

5Yrs 13%

12% 12%

Price ending Mar 21, 2016 Source: FactSet. These are unmanaged indexes and cannot be invested in directly. Past performance does not assure future results.

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April 21 2016

Required Research Disclosures

3 Year Rating and Price History for: VERIZON COMMUNICATIONS as of 04-19-2016

Initiated Coverage PRE-1996...............(H) 7/29/02--7/20/06.....(B) 7/20/06--4/20/10....(H) 4/20/10--9/12/13

09/12/13 B:$47.35

56

52

48 44

40

Q1 Q2 Q3

Q1 Q2 Q3

Q1 Q2 Q3

Q1 Q236

2014

2015

2016

Created by BlueMatrix

Data used to create price chart is provided by Reuters

VERIZON COMMUNICATIONS (NYSE: VZ)

April 21, 2016

Stocks Investment Banking Services

BUY 47% 1%

HOLD 51% 4%

SELL 2% 0%

The table lists the percent of stocks we follow globally in each of our rating categories. Investment banking services indicate the percentage of those companies that have been investment banking clients within the past 12 months.

Analyst Certification

I certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers; and no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report. David Heger, CFA

Buy (B)

Hold (H)

Sell (S)

FYI (FI)

Buy - Our opinion is to Buy this

Hold - Our opinion is to keep this Sell - Our opinion is to Sell this

FYI - For informational purposes

stock. We believe the valuation is stock. We believe the stock is fairly stock. We believe the stock is

only; factual, no opinion.

attractive and total return potential valued and total return potential is overvalued and total return potential

is above average over the next 3-5 about average over the next 3-5

is below average over the next 3-5

years compared with industry peers. years compared with industry peers. years compared with industry peers. Or a special situation exists, such as In some cases we expect a merger, that warrants no action. fundamentals to deteriorate

considerably and/or a recovery is

highly uncertain.

Under Review (UR)

Under Review ? Our rating, estimates, and opinion for this company are under review and should not be relied upon for making investment decisions until updated.

? Initiated Coverage PRE-1996...............(H) 7/29/02--7/20/06.....(B) 7/20/06--4/20/10....(H) 4/20/10--9/12/13 ? Edward Jones publishes research opinions on both the bonds and common stock of this company. Edward Jones utilizes different analysis

techniques in analyzing bonds and common stock investments of the same company. While bond and common stock research opinions about the same issuing company may appear inconsistent or contradictory, the separate opinions should be reviewed independent from one another. ? Analysts receive compensation that is derived from revenues of the firm as a whole which include, but are not limited to, investment banking revenue.

Other Disclosures

? It is the policy of Edward Jones that analysts or their associates are not permitted to have an ownership position in the companies they follow directly or through derivatives.

? Information about research distribution is available through the Investments and Services link on ? For U.S. clients only: Member SIPC --- For Canadian clients only: Member - Canadian Investor Protection Fund ? In general, Edward Jones analysts do not view the material operations of the issuer. ? Holders of shares of companies domiciled outside the country of residence of the holder are generally subject to a withholding tax on dividends paid

by that company. Subject to certain conditions and limitations, these holders may be entitled to a partial refund of the withholding tax or the withholding taxes may be treated as foreign taxes eligible for a deduction or credit against the holder's tax liability. Holders should consult their own tax advisors regarding ownership of shares and the procedures for claiming a deduction, tax credit or a refund of the withholding tax. When investing in companies incorporated outside your own country of residence, an investor should consider all other material risks including currency risk, political risk, liquidity risk and accounting rules differences, which can adversely affect the value of your investment. Please consult your financial advisor for more information. ? Debt ratings should not be considered an indication of future performance. ? All the proper permissions were sought and granted in order to use any and all copyrighted materials/sources referenced in this document. ? Dividend Outlook (1-Year): Rising ? We believe the dividend is likely to increase based on historical trends, the current payout ratio, and/or expected future earnings and cash flow; Stable ? We believe the dividend is stable at the current level and is unlikely to increase or decrease; At Risk ? We believe the dividend is at risk of being reduced or eliminated; No Dividend ? This company does not pay a dividend. ? The Edward Jones' Research Rating referenced does not take into account your particular investment profile and is not intended as an express recommendation to purchase, hold or sell particular securities, financial instruments or strategies. You should contact your Edward Jones Financial Advisor before acting upon the Edward Jones Research Rating referenced. ? Investment Category: Growth & Income - Large-cap companies that pay a dividend, as well as REITs and utility companies; Growth ? Small- and mid-cap companies, excluding REITs and utilities, as well as any large companies that do not pay a dividend; Aggressive- Micro-cap companies, companies with share prices below $4, stocks restricted by Research, and emerging-market stocks. ? Price Movement: Above Average - This stock will likely move up and down to a greater degree than the average stock in the S&P 500 Index. These companies are often growing faster than the average company and/or are in industries that are more sensitive to the economy; Average - This stock will likely move up and down to a similar degree as the average stock in the S&P 500 Index; Below Average - This stock will likely move up and down to a lesser degree than the average stock in the S&P 500 Index. These companies are often more mature, growing slower than the average company, and/or are in industries that are more defensive in nature and less sensitive to the economy. ? Dividends can be increased, decreased or totally eliminated at any point without notice. ? This opinion is based on information believed reliable but not guaranteed. The foregoing is for INFORMATION ONLY. Additional information is available on request. Past performance is no guarantee of future results. ? Our long-term earnings growth estimate is our expectation for growth over the course of a full economic cycle. This "normalized" figure avoids distortions which can occur if beginning- or ending-year results are impacted by one-time items or extreme peaks or troughs within the cycle. ? The S&P 500 Index is based on the average performance of 500 widely held common stocks. The S&P 500 Sector Indexes are subsets of the S&P 500 Index. These are unmanaged indexes and cannot be invested in directly. Past performance does not assure future results.

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