At 7.5%, Verizon Just Makes Sense

A 1-year Treasury Bond pays almost 6%.

Verizon (VZ) pays a dividend yield over 7.5%.

We prefer Verizon.

While it’s not a growth stock, the company oozes cash and trails AT&T (T) as the most searched telecom company by financial pros by two pageviews in the past month.

Many assume Verizon’s hefty dividend payment is a sign of weakness.

We think not.

Verizon’s Business

We’re all familiar with Verizon Wireless, the mobile carrier that tends to have a better brand reputation than its peers.

It boasts a quality network with the most reliable wireless coverage to 99% of the U.S. population with 4G LTE and is expanding its 5G network to 220 million people.

The company also offers fiber-optic broadband and t.v. services through its Fios portfolio.

Revenues are segmented into wireless equipment and service & other.

Source: Verizon Q2 2023 Investor Presentation

Financials

Source: Stock Analysis

The real focus for investors is the financials.

Verizon isn’t a high growth company. Revenues average around 1% per year.

Margins rarely change much from one year to the next.

Much of it comes down to minor adjustments here and there that can dramatically change cash flow.

For example. The company increased long-term debt from $100.7 billion to $143.2 billion in 2021, largely due to the $45.5 billion it paid in the C-band auction for the 5G network.

Yet, interest expense remained largely unchanged.

The real difference between operating cash flow between one year and another is the gross margin.

Just 1%-2% could equate to a billion difference.

More recently, Capex increased from around $18 billion pre pandemic to $22-$23 billion annually.

Still, the company hasn’t seen its net debt increase dramatically. However, it could certainly stand to get back some of that $ 4.5 billion in spends on interest payments each year.

Valuation

Source: Stock Analysis

Verizon isn’t as cheap as AT&T, but it’s got fewer problems. 

Vodaphone (VOD) trades at a lower price-to-cash, price-to-sales, and price-to-book ratio as well as a lower P/E trailing.

T-Mobile (TMUS) is more expensive across the board.

Growth

Source: Seeking Alpha

We found it interesting that VOD and VZ show similar growth metrics, while Telus (TU) and TMUS show better overall growth in revenues and earnings.

Profitability

Source: Seeking Alpha

However, VOD runs a much lower gross margin even if they have a better net income margin. And TMUS doesn’t translate growth down to net income margin, though it has a better free-cash-flow margin.

Thing is, TMUS doesn’t pay a dividend. Management buys back shares at irregular intervals.

Our Opinion 8/10

Verizon is cheap, even if it doesn’t grow. You could argue it’s a value trap.

However, if and when the Fed lowers rates in the coming years, Verizon’s dividend yield will need to shrink through multiple expansion.

It may take a couple of years, but when you’re getting 7.5% while you wait, we think it’s worth it.