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U.S. Research Published by Raymond James & Associates October 21, 2016 Verizon Communications (VZ-NYSE) Company Comment Frank G. Louthan IV, (404)...
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U.S. Research Published by Raymond James & Associates

October 21, 2016

Verizon Communications (VZ-NYSE)

Company Comment

Frank G. Louthan IV, (404) 442-5867, [email protected] Alexander Sklar, CFA, Sr. Res. Assoc., (404) 442-5804, [email protected]

Telecommunications Services: Wireline ___________________________________

Wireless Sub Adds Disappoint; Maintain Outperform on FCF Yield Recommendation: We are maintaining our Outperform rating on Verizon following 3Q results. For investors looking for large-cap names with higher-than-average yield and lower leverage, Verizon will remain attractive, in our view. Additionally, with the potential for its return to EPS growth in 2017, we believe Verizon will remain attractive.

 







Event: Verizon reported mixed 3Q results with financial results largely in-line, but wireless operational metrics missing expectations. The company added 442,000 net postpaid subscribers (below street estimates), which includes (36,000) net postpaid phone losses. The net postpaid phone losses are likely more reflective of the late-3Q competitive environment in our view vs. handset device shortages and Samsung recall. We expect Verizon to return to positive net phone adds in both 4Q and 2017, as its basic phone base continues to dwindle and with new pricing including higher data buckets for subscribers. Enterprise revenue remains weak, as we believe cable competition as well as lackluster GDP growth and under-employment remain challenges. This has been the case for a while, but we believe other carriers are seeing similar signs. Positively, the company saw a nice rebound in margins that are likely to benefit from the resolution of the labor agreement. Given the impact that the Yahoo! stub has on the rest of the Yahoo!’s assets, it is highly likely that a price adjustment or holdback is negotiated by Verizon. We believe the deal will go through, as we believe Yahoo! is integral to a business strategy Verizon is compelled to continue to move forward with. We are, however, pushing our expectations for the close of this transaction out to mid-1Q to account for the delay caused by the breach announcement. We believe the company is going to put the Yahoo! assets under AOL as it further develops the media and content platform. Estimates: We are adjusting our 2016 and 2017 estimates to factor in the two telematics acquisitions (Telogis in 3Q and Fleetmatics assumed in late 4Q). Additionally, we are pushing back our Yahoo acquisition date to mid-1Q as discussed above. Our wireline margin assumptions increase on strong 3Q results and the benefits of the new union deal, and we have slightly lowered our wireless capex in 2017. We have also adjusted the top line to factor in slower wireless adds in 2016.

Valuation: Verizon currently trades at ~12x our 2017E FCF per share estimate of $4.00 with a 4.7% dividend yield, a discount relative to the large-cap cable and telecom space at ~15x. We are adjusting our price target to $56 from $58 on slightly lower numbers, based on 14x our 2017E FCF per share, ~in line with the large-cap telecom and cable peer group, plus a 4% yield, and below its long-term relative P/E vs. the S&P 500. We believe the shares will outperform in the current market and will be viewed as a safer place to invest with less risk and leverage. Non-GAAP EPS 2015A Old 2016E New 2016E Old 2017E New 2017E

Q1 Mar $1.02 1.06A 1.06A 1.02 0.99

Q2 Jun $1.04 0.94A 0.94A 1.04 1.04

Q3 Sep $1.04 1.00 1.01A 1.06 1.02

Q4 Dec $0.89 0.93 0.89 1.01 0.98

Full Year $3.99 3.93 3.90 4.13 4.03

Rating _________________________________ Outperform 2 Current and Target Price __________________ Current Price (Oct-20-16) $49.14 Target Price: Old: $58.00 New: $56.00 52-Week Range $56.95 - $43.79 Suitability Medium Risk/Income Market Data ___________________________ Shares Out. (mil.) 4,086.0 Market Cap. (mil.) $200,786 Avg. Daily Vol. (10 day) 12,414,910 Dividend/Yield $2.31/4.7% Book Value (Sep-16) $5.01 ROE % 38% LT Debt (mil.)/% Cap. $106,591/45% Earnings & Valuation Metrics ______________ 2015A 2016E 2017E P/E Ratios (Non-GAAP) 12.3x 12.6x 12.2x EBITDA (mil.) Old $46,567 $45,535 $47,688 New $46,567 $45,056 $47,096 FCF/Share Old $4.88 $2.51 $4.15 New $4.88 $3.51 $4.00 P/FCF per Share Ratios 10.1x 14.0x 12.3x Company Description ____________________ Verizon Communications, headquartered in New York, New York, is one of the largest telecommunications providers in the United States. The company provides wireless voice and data services to over 100 million customers in the U.S. through Verizon Wireless. Additionally, Verizon provides local exchange, long distance, Internet, video, and other related services to residential, business, wholesale, and government customers.

GAAP EPS Revenues Full Year (mil.) $4.37 $131,620 3.16 125,476 3.00 125,747 4.11 129,629 4.03 128,779

Rows may not add due to rounding. Non-GAAP EPS excludes non-recurring items. UR: Under Review.

Please read domestic and foreign disclosure/risk information beginning on page 3 and Analyst Certification on page 3. © 2016 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved.

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Verizon Communications Inc. (NYSE - VZ) (in billions except per share) 2014A Q1:15A Q2:15A Q3:15A Q4:15A 2015A Q1:16A Q2:16A Q3:16A Q4:16E 2016E Q1:17E Q2:17E Q3:17E Q4:17E 2017E Revenue VZ Wireline Mass Markets Y/Y Growth Global Enterprise Y/Y Growth Global Wholesale Service Y/Y Growth Other Y/Y Growth Total Wireline Y/Y Growth

18.05 4.1% 13.94 -5.2% 6.22 -7.3% 0.48 -0.4% 38.69 -1.4%

4.59 2.9% 3.26 -9.5% 1.52 -4.2% 0.09 -30.2% 9.47 -3.3%

4.63 3.2% 3.23 -9.9% 1.49 -5.0% 0.08 -38.4% 9.42 -3.4%

4.60 1.8% 3.21 -5.2% 1.47 -5.5% 0.08 -32.8% 9.36 -2.3%

4.65 1.5% 3.25 -3.7% 1.50 -0.7% 0.07 -23.7% 9.47 -0.9%

18.47 2.4% 12.94 -7.2% 5.98 -3.9% 0.33 -31.7% 37.72 -2.5%

4.59 0.0% 3.16 -3.1% 1.46 -4.0% 0.08 -15.6% 9.29 -1.9%

3.57 -22.8% 2.91 -9.9% 1.26 -15.8% 0.09 13.0% 7.82 -17.0%

3.59 -22.0% 2.89 -10.0% 1.24 -15.5% 0.08 -8.3% 7.79 -16.8%

3.62 -22.2% 2.89 -10.9% 1.22 -18.6% 0.08 8.1% 7.81 -17.5%

15.37 -16.8% 11.85 -8.5% 5.18 -13.4% 0.32 -1.5% 32.71 -13.3%

3.64 -20.6% 2.83 -10.5% 1.19 -18.4% 0.08 -1.3% 7.74 -16.7%

3.66 2.5% 2.82 -3.0% 1.19 -5.6% 0.08 -13.8% 7.74 -1.1%

3.67 2.3% 2.79 -3.5% 1.17 -5.6% 0.07 -9.1% 7.69 -1.2%

3.68 1.7% 2.83 -2.2% 1.15 -5.5% 0.07 -12.5% 7.74 -1.0%

14.65 -4.6% 11.27 -4.9% 4.70 -9.2% 0.29 -9.4% 30.91 -5.5%

VZ Wireless Service Revenues Y/Y Growth Equipment and Other Y/Y Growth Total Wireless

72.63 5.2% 15.02 25.2% 87.65

17.91 -0.4% 4.41 52.6% 22.33

17.69 -2.2% 4.92 44.6% 22.61

17.60 -4.1% 5.41 55.4% 23.01

17.20 -5.6% 6.54 24.8% 23.73

70.40 -3.1% 21.28 41.7% 91.68

16.81 -6.2% 5.20 17.7% 22.00

16.74 -5.4% 4.96 0.8% 21.70

16.68 -5.2% 5.42 0.2% 22.10

16.62 -3.3% 6.47 -1.1% 23.09

66.86 -5.0% 22.04 3.6% 88.90

16.64 -1.0% 5.43 4.6% 22.07

16.63 -0.6% 5.37 8.2% 22.00

16.63 -0.3% 5.91 9.1% 22.54

16.69 0.4% 7.01 8.4% 23.70

66.59 -0.4% 23.72 7.6% 90.32

8.2%

6.9%

5.3%

5.4%

1.2%

4.6%

-1.5%

-4.0%

-3.9%

-2.7%

-3.0%

0.3%

1.4%

2.0%

2.7%

1.6%

0.75

0.19

0.19

0.80

1.05

2.22

0.88

1.01

1.05

1.20

4.14

1.39

1.93

1.98

2.25

7.55

127.08 5.4%

$31.98 3.8%

$32.22 2.4%

$33.16 5.0%

$34.25 3.2%

131.62 3.6%

$32.17 0.6%

$30.53 -5.3%

$30.94 -6.7%

$32.11 -6.3%

125.75 -4.5%

$31.20 -3.0%

$31.67 3.7%

$32.22 4.1%

$33.69 4.9%

128.78 2.4%

90.95 29.76 52.43 8.76

20.04 7.32 12.33 0.39

20.42 7.21 12.69 0.52

21.61 7.16 13.08 1.38

20.47 7.18 14.63 (1.34)

82.54 28.87 52.73 0.95

20.21 7.11 11.83 1.27

22.00 6.72 11.41 3.87

20.46 6.13 12.17 2.16

21.39 6.14 13.60 1.65

84.05 26.11 49.00 8.94

19.55 6.12 11.83 1.60

19.73 6.08 11.59 2.05

20.35 6.04 12.31 2.00

22.05 6.07 13.82 2.17

81.68 24.31 49.55 7.82

Wireline EBITDA EBITDA margin Wireless EBITDA EBITDA Margin VZ Calculated EBITDA margin Corporate EBITDA

8.93 23.1% 35.22 40.4% 48.5% (0.88)

2.15 22.7% 10.00 44.8% 55.8% (0.20)

2.21 23.5% 9.92 43.9% 56.1% (0.33)

2.20 23.5% 9.93 43.2% 56.4% (0.24)

2.29 24.2% 9.10 38.4% 52.9% (0.47)

8.85 23.5% 38.95 42.5% 55.3% (1.24)

2.18 23.4% 10.17 46.2% 60.5% (0.37)

1.10 14.0% 10.30 47.5% 61.5% (0.32)

1.65 21.2% 9.93 44.9% 59.5% (0.31)

1.67 21.4% 9.49 41.1% 57.1% (0.45)

6.60 20.0% 39.90 44.9% 59.7% (1.44)

1.62 20.9% 10.24 46.4% 61.6% (0.21)

1.66 21.4% 10.41 47.3% 62.6% (0.12)

1.65 21.5% 10.23 45.4% 61.5% (0.02)

1.67 21.6% 9.88 41.7% 59.2% 0.08

6.60 21.4% 40.77 45.2% 61.2% (0.27)

Total EBITDA EBITDA margin Y/Y Growth non-recurring Depreciation and Amortization

43.27 34.1% 2.9% 7.13 16.52

11.95 37.4% 5.8%

11.80 36.6% 5.9%

46.57 35.4% 7.6% (2.51) 16.02

11.98 37.2% 0.3% 0.02 4.02

11.08 36.3% -6.1% 2.54 3.98

11.28 36.5% -5.1% 0.80 3.94

45.06 35.8% -3.2%

11.65 37.3% -2.8%

11.95 37.7% 7.8%

11.87 36.8% 5.3%

11.63 34.5% 8.5%

47.10 36.6% 4.5%

3.98

10.93 31.9% 11.8% (2.85) 4.04

10.72 33.4% -2.0%

3.99

11.89 35.8% 7.5% 0.34 4.01

3.96

15.90

4.02

4.05

4.07

4.09

16.22

Total Operating Expenses

107.47

24.02

24.40

25.62

24.51

98.56

24.23

25.98

24.40

25.35

99.96

23.58

23.78

24.41

26.14

97.91

Operating Income (loss) Y/Y Growth Other income (expense) Equity in income from unconsolidated Other income (expense) - net Interest expense Total other income (expense)

19.61 -38.7%

7.96 11.2%

7.82 1.8%

7.54 9.74 9.2% -556.2%

33.06 68.6%

7.94 -0.2%

4.55 -41.8%

6.54 -13.2%

6.75 -30.7%

25.79 -22.0%

7.63 -4.0%

7.90 73.4%

7.80 19.3%

7.54 11.7%

30.87 19.7%

1.78 (1.19) (4.92) (4.33)

(0.03) 0.08 (1.33) (1.29)

(0.02) 0.03 (1.21) (1.19)

(0.02) 0.05 (1.20) (1.17)

(0.02) 0.03 (1.18) (1.17)

(0.09) 0.19 (4.92) (4.82)

(0.02) 0.03 (1.19) (1.18)

(0.02) (1.83) (1.01) (2.86)

(0.02) 0.10 (1.04) (0.96)

(0.02) 0.03 (1.05) (1.04)

(0.08) (1.67) (4.29) (6.04)

(0.02) 0.02 (1.13) (1.12)

(0.02) 0.03 (1.13) (1.11)

(0.02) 0.04 (1.13) (1.10)

(0.02) 0.02 (1.13) (1.12)

(0.06) 0.11 (4.51) (4.46)

Income before taxes Y/Y Growth

15.28 -47.8%

6.67 -4.1%

6.63 1.3%

6.37 8.58 12.3% -320.7%

28.24 84.8%

6.77 1.5%

1.70 -74.4%

5.58 -12.4%

5.72 -33.4%

19.75 -30.1%

6.50 -3.9%

6.79 300.4%

6.70 20.2%

6.42 12.3%

26.41 33.7%

3.31 21.7%

2.33 35.0%

2.27 34.3%

2.20 34.5%

9.87 34.9%

2.34 34.5%

0.86 51.0%

1.83 32.8%

1.94 34.0%

6.97 35.3%

2.34 36.0%

2.41 35.5%

2.38 35.5%

2.28 35.5%

9.41 35.6%

Y/Y Growth Other Total revenue Y/Y Growth Operating expenses Operations and support Wireline Wireless Other

Income taxes Tax Rate Minority interest Net income (loss) reported Y/Y Growth Recurring EPS Y/Y Growth EPS from non-recurring Reported EPS Y/Y Growth Diluted shares Dividend

3.07 35.7%

(2.33) (0.12) (0.12) (0.13) (0.12) (0.50) (0.12) (0.13) (0.13) (0.13) (0.51) (0.13) (0.13) (0.13) (0.13) (0.50) 9.64 4.22 4.23 4.04 5.39 17.88 4.31 0.70 3.62 3.64 12.27 4.04 4.25 4.20 4.02 16.51 -16.2% 6.9% 0.4% 8.9% -341.6% 85.5% 2.2% -83.4% -10.4% -32.4% -31.3% -6.3% 505.7% 16.0% 10.3% 34.5% $3.43 $1.02 $1.04 $1.04 $0.89 $3.99 $1.06 $0.94 $1.01 $0.89 $3.90 $0.99 $1.04 $1.02 $0.98 $ 4.03 20.6% 12.5% 13.2% 16.7% 24.1% 16.2% 3.1% -9.1% -3.0% 0.6% -2.2% -6.5% 10.2% 1.4% 9.8% 3.3% $ (0.91) $ $ $ (0.05) $ 0.44 $ 0.39 $ $ (0.77) $ (0.12) $ $ (0.89) $ $ $ $ $ $2.52 $1.02 $1.04 $0.99 $1.32 $4.37 $1.06 $0.17 $0.89 $0.89 $3.00 $0.99 $1.04 $1.02 $0.98 $4.03 -37.1% -11.0% 2.1% 11.1% -346.0% 73.4% 3.1% -83.4% -10.5% -32.5% -31.3% -6.5% 503.8% 15.5% 9.8% 34.0% 4.15 4.12 4.09 4.08 4.08 4.09 4.09 4.09 4.09 4.09 4.09 4.09 4.10 4.10 4.11 4.10 $2.14 $0.55 $0.55 $0.57 $0.57 $2.23 $0.57 $0.57 $0.58 $0.58 $2.29 $0.58 $0.58 $0.59 $0.59 $2.33

Free Cash Flow Analysis + VZ EBITDA 43.27 11.95 - Cash operating taxes 4.86 1.51 - Total capital expenditures 17.19 3.67 - Increase (Decrease) in NWC 2.16 0.89 Total free cash flow to investors $19.05 $5.89 Y/Y Growth 85.4% NMF Less interest expense ($4.92) ($1.33) Levered FCF to Investors $14.14 $4.56 Levered FCF Per Share $3.40 $1.11 Y/Y Growth 26.9% NMF Source: Raymond James estimate and company reports

11.80 2.27 4.49 (1.30) $6.34 NMF ($1.21) $5.13 $1.26 NMF

11.89 2.20 4.39 (1.03) $6.33 NMF ($1.20) $5.13 $1.26 NMF

10.93 0.37 5.24 (1.00) $6.32 NMF ($1.18) $5.15 $1.26 NMF

46.57 6.35 17.78 (2.44) $24.89 30.6% ($4.92) $19.97 $4.88 43.4%

11.98 2.17 3.39 1.16 $5.26 NMF ($1.19) $4.08 $1.00 NMF

11.08 3.95 3.89 (0.10) $3.34 NMF ($1.01) $2.33 $0.57 NMF

11.28 1.08 4.13 0.35 $5.73 NMF ($1.04) $4.69 $1.15 NMF

10.72 1.43 5.60 (0.62) $4.31 NMF ($1.05) $3.26 $0.80 NMF

45.06 8.62 16.99 0.80 $18.64 -25.1% ($4.29) $14.35 $3.51 -28.1%

11.65 1.50 3.90 0.85 $5.40 NMF ($1.13) $4.28 $1.04 NMF

11.95 2.31 4.40 (0.09) $5.33 NMF ($1.13) $4.21 $1.03 NMF

11.87 2.21 4.35 (0.10) $5.41 NMF ($1.13) $4.29 $1.05 NMF

11.63 2.12 4.80 (0.03) $4.74 NMF ($1.13) $3.61 $0.88 NMF

47.10 8.14 17.45 0.62 $20.89 12.0% ($4.51) $16.38 $4.00 13.8%

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Ratings and Definitions Raymond James & Associates (U.S.) definitions Strong Buy (SB1) Expected to appreciate, produce a total return of at least 15%, and outperform the S&P 500 over the next six to 12 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, a total return of at least 15% is expected to be realized over the next 12 months. Outperform (MO2) Expected to appreciate and outperform the S&P 500 over the next 12-18 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, an Outperform rating is used for securities where we are comfortable with the relative safety of the dividend and expect a total return modestly exceeding the dividend yield over the next 12-18 months. Market Perform (MP3) Expected to perform generally in line with the S&P 500 over the next 12 months. Underperform (MU4) Expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon. Raymond James Ltd. (Canada) definitions Strong Buy (SB1) The stock is expected to appreciate and produce a total return of at least 15% and outperform the S&P/TSX Composite Index over the next six months. Outperform (MO2) The stock is expected to appreciate and outperform the S&P/TSX Composite Index over the next twelve months. Market Perform (MP3) The stock is expected to perform generally in line with the S&P/TSX Composite Index over the next twelve months and is potentially a source of funds for more highly rated securities. Underperform (MU4) The stock is expected to underperform the S&P/TSX Composite Index or its sector over the next six to twelve months and should be sold. Raymond James Argentina S.A. rating definitions Strong Buy (SB1) Expected to appreciate and produce a total return of at least 25.0% over the next twelve months. Outperform (MO2) Expected to appreciate and produce a total return of between 15.0% and 25.0% over the next twelve months. Market Perform (MP3) Expected to perform in line with the underlying country index. Underperform (MU4) Expected to underperform the underlying country index. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon. Raymond James Europe (Raymond James Euro Equities SAS & Raymond James Financial International Limited) rating definitions Strong Buy (1) Expected to appreciate, produce a total return of at least 15%, and outperform the Stoxx 600 over the next 6 to 12 months. Outperform (2) Expected to appreciate and outperform the Stoxx 600 over the next 12 months. Market Perform (3) Expected to perform generally in line with the Stoxx 600 over the next 12 months. Underperform (4) Expected to underperform the Stoxx 600 or its sector over the next 6 to 12 months. Suspended (S) The rating and target price have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and target price are no longer in effect for this security and should not be relied upon. In transacting in any security, investors should be aware that other securities in the Raymond James research coverage universe might carry a higher or lower rating. Investors should feel free to contact their Financial Advisor to discuss the merits of other available investments. Rating Distributions Coverage Universe Rating Distribution*

Investment Banking Distribution

RJA

RJL

RJ Arg

RJEE/RJFI

RJA

RJL

RJ Arg

RJEE/RJFI

Strong Buy and Outperform (Buy)

54%

69%

56%

53%

18%

42%

11%

0%

Market Perform (Hold)

42%

30%

44%

35%

7%

21%

0%

0%

Underperform (Sell)

4%

1%

0%

12%

5%

0%

0%

0%

* Columns may not add to 100% due to rounding.

© 2016 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved.

International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863

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Raymond James

U.S. Research

Suitability Ratings (SR) Medium Risk/Income (M/INC) Lower to average risk equities of companies with sound financials, consistent earnings, and dividend yields above that of the S&P 500. Many securities in this category are structured with a focus on providing a consistent dividend or return of capital. Medium Risk/Growth (M/GRW) Lower to average risk equities of companies with sound financials, consistent earnings growth, the potential for long-term price appreciation, a potential dividend yield, and/or share repurchase program. High Risk/Income (H/INC) Medium to higher risk equities of companies that are structured with a focus on providing a meaningful dividend but may face less predictable earnings (or losses), more leveraged balance sheets, rapidly changing market dynamics, financial and competitive issues, higher price volatility (beta), and potential risk of principal. Securities of companies in this category may have a less predictable income stream from dividends or distributions of capital. High Risk/Growth (H/GRW) Medium to higher risk equities of companies in fast growing and competitive industries, with less predictable earnings (or losses), more leveraged balance sheets, rapidly changing market dynamics, financial or legal issues, higher price volatility (beta), and potential risk of principal. High Risk/Speculation (H/SPEC) High risk equities of companies with a short or unprofitable operating history, limited or less predictable revenues, very high risk associated with success, significant financial or legal issues, or a substantial risk/loss of principal.

Raymond James Relationship Disclosures Raymond James expects to receive or intends to seek compensation for investment banking services from the subject companies in the next three months. Company Name

Disclosure

Verizon Communications

Raymond James & Associates makes a market in shares of VZ. Raymond James & Associates received non-investment banking securities-related compensation from VZ within the past 12 months.

Stock Charts, Target Prices, and Valuation Methodologies Valuation Methodology: The Raymond James methodology for assigning ratings and target prices includes a number of qualitative and quantitative factors including an assessment of industry size, structure, business trends and overall attractiveness; management effectiveness; competition; visibility; financial condition, and expected total return, among other factors. These factors are subject to change depending on overall economic conditions or industry- or company-specific occurrences. Only stocks rated Strong Buy (SB1) or Outperform (MO2) have target prices and thus valuation methodologies. Target Prices: The information below indicates our target price and rating changes for VZ stock over the past three years.

Valuation Methodology: Our valuation methodology for Verizon is based on an FCF/share multiple compared with peers, and also considers forward earnings relative to the S&P 500 and an EV/EBITDA multiple analysis.

© 2016 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved.

International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863

5

Raymond James

U.S. Research

Risk Factors General Risk Factors: Following are some general risk factors that pertain to the businesses of the subject companies and the projected target prices and recommendations included on Raymond James research: (1) Industry fundamentals with respect to customer demand or product / service pricing could change and adversely impact expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change investor attitudes toward the sector or this stock; (3) Unforeseen developments with respect to the management, financial condition or accounting policies or practices could alter the prospective valuation; or (4) External factors that affect the U.S. economy, interest rates, the U.S. dollar or major segments of the economy could alter investor confidence and investment prospects. International investments involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. Specific Investment Risks Related to the Industry or Issuer Company-Specific Risks for Verizon Communications Verizon faces a significant amount of competition from other wireless providers, cable companies, and competitive telecom carriers, which could significantly impact the company's revenue and earnings. In turn, competition could negatively impact pricing, both for traditional telephony services and for broadband, wireless, and other services. These growing services are offsetting currently declining traditional telephony services, a mix-shift that could negatively impact overall company margins. Other risks include, but are not limited to, increasing pension expenses, a highly unionized workforce, a large debt load, and a continued weak business spending environment. Dividends are not guaranteed and may fluctuate or be eliminated in future quarters. The company is highly regulated and subject to regulatory risk on multiple fronts.

Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available at rjcapitalmarkets.com/Disclosures/index. Copies of research or Raymond James’ summary policies relating to research analyst independence can be obtained by contacting any Raymond James & Associates or Raymond James Financial Services office (please see raymondjames.com for office locations) or by calling 727-567-1000, toll free 800-237-5643 or sending a written th request to the Equity Research Library, Raymond James & Associates, Inc., Tower 3, 6 Floor, 880 Carillon Parkway, St. Petersburg, FL 33716. For clients in the United Kingdom: For clients of Raymond James & Associates (London Branch) and Raymond James Financial International Limited (RJFI): This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in the FCA rules or persons described in Articles 19(5) (Investment professionals) or 49(2) (High net worth companies, unincorporated associations etc) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended) or any other person to whom this promotion may lawfully be directed. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is therefore not intended for private individuals or those who would be classified as Retail Clients. For clients of Raymond James Investment Services, Ltd.: This report is for the use of professional investment advisers and managers and is not intended for use by clients. For purposes of the Financial Conduct Authority requirements, this research report is classified as independent with respect to conflict of interest management. RJA, RJFI, and Raymond James Investment Services, Ltd. are authorised and regulated by the Financial Conduct Authority in the United Kingdom. For clients in France: This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in “Code Monétaire et Financier” and Règlement Général de l’Autorité des Marchés Financiers. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is therefore not intended for private individuals or those who would be classified as Retail Clients. For clients of Raymond James Euro Equities: Raymond James Euro Equities is authorised and regulated by the Autorité de Contrôle Prudentiel et de Résolution and the Autorité des Marchés Financiers. For institutional clients in the European Economic Area (EEA) outside of the United Kingdom: This document (and any attachments or exhibits hereto) is intended only for EEA institutional clients or others to whom it may lawfully be submitted. For Canadian clients:

© 2016 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved.

International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863

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Raymond James

U.S. Research

This report is not prepared subject to Canadian disclosure requirements, unless a Canadian analyst has contributed to the content of the report. In the case where there is Canadian analyst contribution, the report meets all applicable IIROC disclosure requirements. Proprietary Rights Notice: By accepting a copy of this report, you acknowledge and agree as follows: This report is provided to clients of Raymond James only for your personal, noncommercial use. Except as expressly authorized by Raymond James, you may not copy, reproduce, transmit, sell, display, distribute, publish, broadcast, circulate, modify, disseminate or commercially exploit the information contained in this report, in printed, electronic or any other form, in any manner, without the prior express written consent of Raymond James. You also agree not to use the information provided in this report for any unlawful purpose.

This is RJA client

releasable resear ch

This report and its contents are the property of Raymond James and are protected by applicable copyright, trade secret or other intellectual property laws (of the United States and other countries). United States law, 17 U.S.C. Sec.501 et seq, provides for civil and criminal penalties for copyright infringement. No copyright claimed in incorporated U.S. government works.

© 2016 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved.

International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863

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