Verizon (VZ -0.10%) is often considered a stable income play because it's one of the top telecom companies in the U.S. and pays a hefty forward dividend yield of 6.4%. But over the past five years, its stock actually declined more than 30%. Even after including reinvested dividends, it delivered a negative total return of 9%.
Verizon lost its luster as it struggled with the sluggish growth of its core wireless business, declining margins, and high debt levels. But at nine times forward earnings, could it be a great turnaround play for value-seeking income investors?
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Why did investors give up on Verizon?
Verizon generated 76% and 22% of its revenue from its consumer and business groups, respectively, in 2023. Here's how those two core businesses fared over the past five years.
|
Metric |
2019 |
2020 |
2021 |
2022 |
2023 |
|---|---|---|---|---|---|
|
Consumer Revenue Growth |
1.4% |
(2.8%) |
7.6% |
8.6% |
(1.8%) |
|
Business Revenue Growth |
(0.3%) |
(1.5%) |
0.3% |
0.1% |
(3.1%) |
|
Consolidated Revenue Growth |
0.8% |
(2.7%) |
4.1% |
2.4% |
(2.1%) |
Data source: Verizon.
In 2023, Verizon's consumer business struggled as it gained new wireless subscribers at a slower rate than AT&T (T -0.44%) and T-Mobile (TMUS -0.29%). Its smaller consumer wireline business, which provides broadband services, also stalled out. It attributed a lot of that slowdown to the tough promotional environment. At the same time, the macro headwinds curbed the growth of its business wireless and wireline divisions as more companies reined in their spending on telco-oriented upgrades.
Brighter days could be ahead
However, in the first nine months of 2024, Verizon's consumer revenue rose 0.9% year over year, its business revenue dipped 2.1%, and its total revenue still grew 0.3%. It attributed the recovery of its consumer group to its focus on localized incentives and marketing campaigns, the expansion of its customizable "myPlans," the growth of its distribution business within Walmart (WMT -1.22%), and its recent acquisition of the mobile virtual network operator (MVNO) TracFone.
Verizon's wireless retail churn rate of 1.62% in the first nine months of 2024 also represented an improvement from its churn rate of 1.67% in 2023 and 1.63% in 2022. Moreover, the wireless group's earnings before interest, taxes, depreciation, and amortization (EBITDA) margins reached 43.4% in the first nine months of the year, up from 41.4% in 2023 and 40.2% in 2022.
That expansion was driven by layoffs and other cost-cutting measures that offset the pressure from its low-margin promotions. Those improvements also challenge the bearish notion that Verizon's margins will crumble as its revenue growth stalls out.
For the full year, Verizon expects its total wireless service revenue to rise 2% to 3.5%, its adjusted EBITDA to grow 1% to 3%, and its adjusted EPS to decline 0% to 4.5%. Analysts expect its total revenue to stay nearly flat as its adjusted EPS dips 2%.
Verizon didn't provide any guidance for its full-year free cash flow (FCF), but its FCF of $14.5 billion in the first nine months of 2024 nearly matched its FCF of $14.6 billion in the same period of 2023. It also easily covered its $8.2 billion in year-to-date dividend payments.
But its near-term catalysts are limited
Verizon's business is stabilizing, but it still had a high net unsecured debt-to-adjusted-EBITDA ratio of 2.5 at the end of the third quarter of 2024. That only represented a slight reduction from its ratio of 2.6 a year earlier.
Therefore, Verizon is in the same boat as AT&T, which is growing at a comparable rate, faces similar headwinds, and has similar leverage. Both of these high-yielding telecom stocks could certainly become more attractive as interest rates decline, but that trend could also drive investors toward higher-growth stocks instead of dusty dividend plays.
Is it the right time to buy Verizon?
Verizon's low valuation and high yield should limit its downside potential and make it a compelling alternative to bonds or CDs as interest rates decline. But it's not a great pick for more aggressive investors who want to consistently beat the market.
So, if you're an income-oriented investor, it might be smart to buy Verizon's stock while its P/E ratio is still in the single digits. However, investors who are seeking out bigger gains should look for companies that have more growth potential.
