Telecommunications company Verizon Communications (VZ -0.10%) is the largest wireless carrier in the United States, with over 37% of the market. The company is also an outstanding dividend stock with a 6.2% dividend yield today and an ongoing streak of 18 consecutive annual dividend raises.
So, if you're looking for passive income to cover your living expenses or to reinvest and supercharge your portfolio's compounding, Verizon is a great candidate for you right now.
But what about moving forward? The telecom industry is notoriously competitive among the few companies that dominate the U.S. market, and there's a constant need to spend to maintain and upgrade the vast infrastructure that makes wireless communications work.
Here is what investors can expect from the stock over the next five years.
Subscriber momentum is trending upward
Consumers make Verizon's business go: Consumer wireless and wireline (Fios fiber optic services and landline phone connections) account for about 75% of the company's total revenue. Subscriber growth is critical because the industry is ruthlessly price competitive; acquiring customers is the best route to growth.
Verizon's subscriber activity is lumpy. For example, Q4 is generally a big quarter due to the purchases consumers tend to make during the holidays (and the new iPhone usually launches in the fall). As you can see, subscriber losses have trended lower since Q1, turning positive this past quarter:
Image source: Verizon Communications.
Verizon acquired TracFone, a leading prepaid phone carrier with 20 million users at the time, in late 2021. However, Verizon has bled prepaid customers since closing the acquisition. It's encouraging to see Verizon slowly stem those losses and return to prepaid customer growth in Q3.
However, Verizon's growth outlook is still limited
Verizon has growth opportunities in fiber optics (Fios) and edge computing. As more devices connect to networks, they must transmit more data faster. This spans across the economy, from factory equipment to autonomous vehicles. Verizon is gradually expanding its Fios services, including fiber optic internet, allowing far higher bandwidth.
The company has agreed to acquire Frontier Communications, the country's largest pure-play fiber provider, for $20 billion to expand its fiber optics footprint. Post-acquisition close, Verizon will have approximately 25 million fiber customers, with a 2028 goal of 30 million and a long-term goal of between 35 million and 40 million.
Despite this opportunity, Verizon's mature consumer business (75% of total revenue) will likely continue to limit the company's broader growth prospects. Analysts recently raised their long-term earnings growth estimates but still anticipate just 2.4% annualized growth over the long term.
What will the next five years look like?
Verizon's lacking growth will ultimately make the stock a poor fit for investors who want to maximize their total investment returns.
The good news is that Verizon's dividend remains on solid footing. Verizon's dividend payout ratio is 59% of 2024 earnings estimates, so there's room for the company to continue increasing its dividend over the coming years. Verizon's dividend has only grown by an average of 2% annually over the past five years, and I'd expect that pace to continue, given Verizon's similar growth prospects.
Meanwhile, the stock trades at 9 to 10 times 2024 earnings estimates, which seems cheap compared to the broader market -- the S&P 500 trades at 23 times earnings. Again, Verizon's slow growth is the culprit. The reality is that Verizon's probably fully valued at its current price, perhaps even a touch expensive at a PEG ratio of 3.1 today.
In that case, investors can expect mid- to high-single-digit annualized investment returns over the next five years. You'll get about 6% from the dividend plus another 2% in earnings growth, though any fluctuations in valuation could impact those returns. That makes Verizon attractive for retirees and other conservative, income-focused investors, but it is probably a pass for others.
