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Is Verizon (VZ)’s 6.4% Dividend Yield Worth it?
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Year-to-date, the S&P Telecom sector is up over 17%. Yet, after yesterday’s decline, heavyweight Verizon (VZ) is up just 3%. That puts its stock behind key competitors like AT&T (T) and T-Mobile (TMUS), which is somewhat of a problem. You see, Verizon’s management talks as if it’s a growth company. Yet sales climbed a paltry 0.6% YoY for the quarter, which analysts attributed to aggressive pricing. They predict it will translate into volume losses in the back half of this year. Money managers continue to seek out the company despite the recent selloff, according to our TrackStar data. With a 6.3% dividend yield that is well-covered, financial pros still find the stock attractive. But is the stock a screaming buy or just a proxy for holding bonds? Verizon’s Business Operating one of the largest wireless networks in the U.S., Verizon provides mobile voice and data services, broadband internet, and TV services to consumers and businesses. The company serves nearly 145 million wireless retail connections and has expanded its offerings to include fixed wireless access (FWA) broadband, which has seen rapid adoption with over 3.8 million subscribers as of Q2 2024. Verizon segments its business into the following areas:
In Q2 2024, Verizon’s wireless service revenue grew by 3.5% to $19.8 billion, driven by pricing actions and continued fixed wireless adoption. Retail postpaid phone net additions hit 148,000, with retail postpaid net additions of 340,000. Broadband total net additions of 378,000 was the eighth consecutive quarter of more than 375,000 additions.
Source: Verizon Q2 2024 Earnings Presentation The company’s Fixed Wireless Access (FWA) service has been a huge success. Instead of cable, the company uses its 5G network to deliver high-speed internet to customers through an in-home access point. Verizon’s strategic focus on network expansion and 5G deployment continues to shape its future. Financials
Source: Stock Analysis Like most telecom companies, Verizon is a slow mover. The company averaged just 0.43% annual sales growth over the last five years. During that time, net income halved, as did profit margin in 2023, driven by a $5.8 billion goodwill impact and about $2.6 billion in higher SG&A. However, it was largely non-cash items since cash from operations grew between 2022 and 2023. Capital expenditure (Capex) dropped during that same period from $23.1 billion to $18.8 billion as the company spent less on building out its 5G network. Overall, Verizon generates enough cash to cover its dividend, which has a 5-year growth rate of about 2.0%. However, total debt has soared to $180.7 billion, nearly doubling interest expenses from $3.6 billion in 2022 to $6.0 billion in the last 12-month period. Lower rates from the Fed would certainly help the company pad its bottom line. Valuation
Source: Seeking Alpha Verizon’s current valuation aligns it with AT&T across most metrics, though a bit more expensive in some, like price-to-cash flow. It doesn’t hold the same premiums seen in T-Mobile since it lacks growth and free cash flow margin. Compared to BCE (BCE), it’s cheaper on a price-to-cash-flow basis, though more expensive than Vodafone (VOD) on the same metric. Growth
Source: Seeking Alpha Verizon’s sales growth is non-existent. But in this sector, that’s pretty good when you look at AT&T and Vodafone. Only T-Mobile displays anything someone might label as sales growth. But all have seen free cash flow drop over the last several years. Profitability
Source: Seeking Alpha Verizon’s gross margins aren’t the best. But it’s net income margin will improve as the goodwill impairment at the end of 2023 lapses. Still, the company is weighed down by its interest expenses, giving it lower-than-average returns on equity, assets, and total capital.
Our Opinion 7/10 You don’t have to worry about Verizon’s ability to pay its dividend. However, the company needs the Fed to cut rates to help it reduce its debt expenses and improve its bottom line. Growth isn’t where it needs to be. Yet, we like the FWA idea and believe it has more growth potential than many realize. We also see the new iPhones with AI boosting subscriber additions over the next 6-12 months. |
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