Verizon Communications (NYSE: VZ) offers investors a compelling value and income opportunity despite recent challenges facing the telecommunications industry. The company’s essential services, strong dividend, and reasonable valuation make it a defensive investment to consider.
Overview of Verizon
Verizon is the largest wireless carrier in the United States. The company provides wireless, wireline, converged communications, information, and entertainment services to retail, enterprise, and wholesale customers.
Some key facts about Verizon:
- Serves approximately 120 million mobile connections with 115 million postpaid subscribers on its wireless network.
- Offers fiber-optic network services to deliver integrated business solutions.
- Verizon revenue for the twelve months ending September 30, 2023 was $134.095B
- Pays a dividend yielding over 7.1%, which it has increased for 15 consecutive years.
- Trades at a forward P/E ratio of 7.5, below the S&P 500’s 18.
Wireless Leadership Despite Intensifying Competition
Verizon operates America’s largest 4G LTE and 5G networks, covering over 92% of the population. The company continues investing heavily in its network to maintain its lead in next-generation wireless technology.
However, competition in wireless services has intensified in recent years. T-Mobile and AT&T have been aggressive in 5G buildouts, unlimited data plans, and promotional offers. This competition has made subscriber gains more challenging for Verizon.
In 2022, Verizon lost wireless subscribers in two quarters due to intense competition, higher prices, and economic pressures on consumers. While concerning, Verizon’s loyalty and high-value customer base provide resilience versus peers.
To improve trends, Verizon has increased promotional investment and simplified pricing. With network leadership and strong customer satisfaction, Verizon appears well-positioned to compete as 5G further rolls out.
Wireline Decline Partially Offset by Broadband Growth
Verizon’s traditional wireline telephone business has been in secular decline for over a decade due to wireless substitution and cable competition. This business will likely continue shrinking in the years ahead.
However, Verizon has partially offset wireline pressures through expanding its fiber-optic network across the country. Demand growth for broadband internet has supported fiber customer additions in recent quarters.
Verizon’s fiber investments position it well to benefit from long-term data growth trends. The company can leverage its network and bundled offerings to take market share in broadband services.
Healthy Profitability Despite Revenue Pressures
Intensifying competition in wireless and wireline declines have weighed on Verizon’s revenue growth. However, the company has maintained strong profitability through cost management and margin improvement initiatives.
In 2021, Verizon expanded its adjusted EBITDA margin to over 35% and delivered $2.32 in adjusted EPS, up 4% year-over-year. The company is targeting $2.40-$2.50 in 2022 EPS.
Maintaining profitable operations is crucial for Verizon to support its large dividend obligations. The company’s focus on margins should help preserve earnings power.
Outlook Clouded by Industry Headwinds
Looking ahead, Verizon faces risks from ongoing wireline erosion and wireless competition. Moreover, the company spent over $50 billion acquiring 5G spectrum licenses, requiring heavy network investment.
High inflation could also squeeze consumer spending and raise Verizon’s operating costs. An economic downturn would likely impact wireless subscriber additions as well.
On the positive side, 5G network leadership could stimulate upgrades to premium price plans. And enterprise solutions offer further growth potential as businesses digitize operations.
But industry headwinds have weighed on Verizon’s stock in 2022 along with the broad market downturn. Shares trade 30% below 2021 highs. The unclear outlook could lead to ongoing volatility until trends improve.
7% Dividend Yield and Reasonable Valuation
Verizon has increased its dividend for 15 consecutive years, recently yielding over 7%. The payout is supported by consistent free cash flow generation exceeding $15 billion annually.
In 2021, Verizon’s dividend payout ratio was a comfortable 46% of adjusted earnings. This suggests ongoing dividend growth is likely without putting too much pressure on profits.
Additionally, Verizon provides a valuation opportunity relative to the market. Shares trade at just 7.5 times forward earnings estimates, a significant discount to the S&P 500’s P/E of 18.
Verizon’s low valuation and high dividend yield offer an attractive risk-reward profile. The stock appears positioned to provide defensive income and upside potential from today’s depressed levels.
Verizon: A Unique Value and Income Opportunity
Verizon faces uncertainty over wireline declines and tough wireless competition. However, the company maintains an advantaged network position and commitment to profitability that should drive long-term value.
Moreover, Verizon offers income investors a stable 7% dividend yield that appears sustainable. The company’s services remain essential regardless of economic conditions.
For investors seeking income and defense, Verizon stands out in today’s volatile market. The company’s reasonable valuation and strong dividend make it a compelling investment despite near-term industry challenges.