The recent market volatility has brought down the valuation of many banks and increased dividend yields. But investors sold more than national and regional banks stocks. They also exited the broader market. But the selling is undoubtedly excessive. Moreover, retail and institutional investors indiscriminately sold companies, even those without bank stock exposure. As a result, there is value to be had in the market, even after the recent uptick after a good inflation report.
One stock that sold off during the market turmoil caused by regional bank failures was Verizon Communications (VZ). The stock reached a dividend yield of slightly over 7% and a decade high. The stock price has recovered somewhat, but Verizon still has a high dividend yield and is attractively valued. In addition, the dividend safety is excellent, considering the high yield.
Verizon Communications Overview
Verizon is one of three companies controlling the United States cellular market. The firm has about 120 million wireless connections, including 91 million postpaid and 24 million prepaid customers and around 25 million data devices. It also has a business and retail broadband offering, including FiOS, nearly 8 million in total. Lastly, Verizon serves approximately 25 million fixed-line telecom connections in the northeast. The firm sold its AOL and Yahoo content businesses in 2021.
Total revenue was $136,835 million in 2022 and the past twelve months. Verizon is the No. 2 telecommunications company by revenue after AT&T(T). Verizon has grown organically and through mergers and acquisitions. In 2021, the telecom giant acquired Tracfone, adding 20 million prepaid wireless customers. Today, Verizon, AT&T, and T-Mobile together control more than 90% of the wireless market.
Growth and Outlook
One concern was in 2022, Verizon struggled with retail cellular subscriber growth. But the company ended 2022 on a stronger note. Also, statements by the company imply the trend may have started to reverse in 2023. Additionally, Verizon forecasted wireless growth of about 2.5% to 4.5%. In addition, broadband growth is robust, with the company adding 1.29 million subscribers in 2022 alone.
The forward dividend yield is approximately 6.7%+, near the highest in the past decade and greater than the 5-year average. This dividend yield is more than triple the average of the S&P 500 Index too.
Verizon is a Dividend Contender, having increased the dividend for 19 years. The growth is steady but small. The company raises the dividend at a constant rate of roughly 2% annually. The last dividend increase was to $0.6525 from $0.64 per share, giving an annual payout of $2.61.
Verizon’s dividend safety is solid, considering the high yield based on earnings, free cash flow (FCF), and the balance sheet.
The dividend payout ratio is only about 50% based on the current rate and consensus 2023 earnings of ~$4.68 per share. Our target value is 65% or less. This moderate value indicates a dividend cut is unlikely despite the high yield.
In 2022, operating cash flow (OCF) was $37,141 million, and capital expenditures were $23,087 million, giving an FCF of $14,054 million. The annual dividend required $10,805 million. These values result in a dividend-to-FCF ratio of almost 77%. This is slightly higher than our target value, but capital expenditures were elevated from 2021 to 2022 because of the 5G C-Band rollout. Verizon has indicated the outlays will be lower by several billion in 2023 and even less in 2024. Hence, the ratio based on FCF will be lower and below our target of 70% or less.
Looking at the balance sheet, the company has $178,352 million in net debt, which sounds like a lot. But telecommunications are a capital-intensive business requiring periodic purchases of wireless spectrum. Despite the high debt, the rating agencies give Verizon a BBB+ / Baa1 lower-medium investment grade credit rating. In addition, the leverage ratio is 3.2X, and interest coverage of more than 9.1X, adding confidence concerning dividend safety.
Completive Advantages and Risks
Verizon’s competitive advantage is its scale giving the company cost and operational efficiencies. Further, the wireless and broadband markets are capital intensive requiring significant investment in spectrum and technology, and only some companies can compete. Second, Verizon’s wireless network is perceived as having higher quality with broad geographic coverage.
The primary risk for Verizon is the intense competition in both the wireless and broadband markets. Despite operating in an oligopoly with AT&T and T-Mobile in wireless, there is little in the way of switching costs between competitors. Next, besides AT&T, cable companies compete in broadband.
Valuation and Final Thoughts
Verizon is undervalued based on the price-to-earnings ratio. The forward P/E ratio is ~8.3X, well below the 5-year range. Few stocks offer this combined dividend yield, safety, and undervaluation. As a result, Verizon makes a solid choice for income investors seeking yield and some dividend growth with a long-term view.
Disclosure: Long VZ
About the Author:
Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.
Disclaimer: The author is not a licensed or registered investment adviser or broker/dealer. He is not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.