There are two manifest attributes to an investment in Verizon Communications Inc. (NYSE:VZ) that every investor should weigh: on one hand, it is probably as safe an investment as one can find. With a yield nearing 5%, income oriented investors can sleep well with VZ.
On the other hand, the shares have lagged the S&P 500 by a wide margin over one, five and ten-year periods. Now consider that since 2014, the company has only increased revenues by about 5%.
For years we have heard that 5G might propel the stock upward, but Verizon spent $52.9 billion buying spectrum in 2021 alone. Furthermore, telecommunications companies devote prodigious sums to capex. Capex totaled $20.3 billion in 2020, and should remain near that figure in 2022 and 2023. However, management is guiding for capital spending of $17 billion in 2024 and 2025.
With prospects of lower capex, 5G on the horizon, and a forward P/E below 10, is now the time to invest in Verizon?
Why The Drop In Verizon Stock?
I spent hours researching why an investment in Verizon fared so poorly throughout 2021 and into 2022. To place the current share price in perspective, the stock traded at a hair above $50 during the depths of the COVID-19 market collapse. As I write these words, VZ is trading for roughly $53.00.
A possible concern is the company’s debt load. Verizon carried approximately $101 billion in long term debt in 2019. That metric increased to roughly $123 billion at the end of 2020, and grew to $151 billion last year. However, the size of the debt should be placed in context. Verizon is ranked among the top thirty US firms in terms of market cap. S&P rates the company’s credit as BBB+/stable, and Moody’s provides a comparable Baa1/stable rating, so the company’s debt should not be a major concern.
A second headwind could be that in FY 2021, the company missed analysts’ estimates on a number of occasions. Even so, operating revenues increased 4.1%, and EPS rose from $4.30 in 2020 to $5.32 last year.
Verizon also added 1.1 million wireless subscribers and 41,000 wireline broadband customers. The company’s build out of 5G home service has exceeded management goals: VZ now has 5G available to 100 million homes.
Perhaps prospects for higher interest rates on bonds are driving investors away. The problem with that assertion is that other bond proxies, which is how an investment in VZ is sometimes characterized, are not suffering. For example, utility and REIT ETFs are near all-time highs.
After a great deal of research and due deliberation, I can only conclude that the fall in Verizon’s share price is an anomaly of sorts.
What The Latest Quarterly Results Provide
VZ provided Q4 2021 results in late January. The company beat analysts’ estimates on the top and bottom line. Q4 Non-GAAP EPS of $1.31 beat consensus by $0.03 and was up $0.10 year-over-year. Adjusting for the sale of Verizon Media last September, revenue of $34.1B grew 4.8%, topping estimates by $120 million.
For wireless, Verizon added 1,058,000 retail postpaid net additions, and for broadband, the company reported 106,000 total net additions from Fios and DSL, a 30,000 increase over 2020.
Verizon's acquisition of TracFone Wireless is gaining steam. TracFone's revenue in Q4 was up $700 million versus 2020. The company’s postpaid phone churn was 0.81%. The company also posted a 2.6% year-over-year gain in average revenue per account.
Management guides for organic service and other revenue growth of around 3%, and wireless service revenue growth of 9% to 10%. Adjusted EBITDA is projected to increase by 2% to 3%. The company also guides for adjusted EPS of $5.40 to $5.55 well ahead of the $5.39 consensus.
Heavy capex spend resulted in a reduction in FCF to $19.3 billion versus $23.6 billion in 2020.
Where We Could See Growth
During presentations and earnings calls, management’s commentary regarding the growth potential of 5G is rather ebullient. Verizon's 5G ultra-wideband network now reaches 100 million people in more than 1,700 cities in the U.S.
Verizon revealed that customers with 5G phones are 2.5x more likely to subscribe to the company’s premium unlimited plans, driving up the average revenue per account. Therefore, consumers' adoption of 5G cell phones should spur growth.
5G could provide strong growth opportunities for the company, but that is far from a foregone conclusion. Management does not expect material increases in 5G related revenues until 2023. Even so, by their own estimates, VZ will not experience robust growth for the foreseeable future.
Verizon’s current forecast is for 4% annual service and overall revenue growth in 2024 with slightly higher growth beginning in 2025. EBITDA is projected to increase at a rate equal to or above revenue growth.
As previously noted, capex is expected to fall to a range of $17 billion in 2024 and 2025, about $4 billion below the average capex in 2021 through 2023. Along with debt reduction, this should bolster the bottom line.
The Play On +play
About a week ago, Verizon debuted +play. +play is a digital store that combines video streaming and other subscription services on a single platform. The following excerpt from Verizon’s news center provides an overview of the platform’s offerings:
Through new partnerships with Netflix, Peloton, Live Nation’s Veeps and featuring leading services like Disney+, discovery+, A+E Networks, AMC+ and many others, the hub will give Verizon customers a simple and efficient way to access and take advantage of exclusive deals for content services.
Verizon will undoubtedly receive wholesale discounts from the service providers and will likely pass some of that along to customers as a discount off the prevailing retail price. In time, this is likely to provide a new, high margin revenue stream for VZ. It is also reasonable to assume that +play will increase customer loyalty and reduce churn.
In prior AT&T (T) articles, I’ve provided stats regarding reduced churn related to HBO Max. I will speculate that AT&T’s spinoff of HBO Max will eventually lead to increased wireless subscriber churn for that company, and if I am correct, +play could exacerbate such a trend.
Is Verizon Stock Undervalued?
VZ currently trades for $53.53 a share. The average 12-month price target of the 15 analysts rating the company is $59.20. The price target of the three analysts that rated the stock following the most recent quarterly report is $58.00.
Verizon’s forward P/E is 9.97x, about two points below the 5-year average P/E. The company’s 5-year PEG of 2.64x compares well to its average PEG over the last five years of 3.84x.
The current yield is 4.78%. The payout ratio is a hair below 47%, and the 5-year dividend growth rate is 2.09%.
From the middle of 2018 until late in 2021, the yield has seldom climbed above 4.6%. In fact, it was common during that time frame for the yield to drop below 4%.
Is VZ Stock A Buy, Sell, Or Hold?
My due diligence research determined there is no substantial reason for the stock’s malaise over the last year. I suspect the primary cause is that the stock is out of favor due to the increased debt associated with the 5G buildout and slow growth prospects.
Furthermore, despite all of the hype, 5G is unlikely to drive strong growth in VZ stock for the foreseeable future. This is evidenced by management's low double-digit forecasts for revenue growth in coming years.
However, Verizon also guides for significant reduction in debt and capex which should bolster FCF. Furthermore, in relation to the company’s historic valuation metrics, the shares are trading at a significant discount.
With the possible exception of those interested in a short term trade, for those seeking capital gains, VZ is an unlikely candidate.
However, for investors seeking a safe stock with a robust yield that trades at a reasonable price, VZ is likely a sound investment.
With the latter group of investors in mind, I rate VZ as a BUY.
