As recession fears continue to grow, investors are searching the markets for companies that can retain value in difficult economic circumstances.
One company gaining a lot of attention is Verizon (NYSE:VZ), which is scheduled to announce Q2 earnings on July 22.
The company appears to have several things going for it, including a 5G rollout, in-demand products, and an attractive 5% yield on its shares.
But maybe even more important than those advantages is the fact that consumers will continue to need the company’s services (like cellular service) even in a lousy economy.
That’s good news for Verizon and its investors because fears of a recession may be turning into reality.
Are We Already in a Recession?
The United States’ Gross Domestic Product (GDP) growth rate decreased by 1.6% in Q1 of this year. If Q2 estimates, due July 28, show another decline, that will confirm what many experts suspect – we are in a genuine recession right now.
Even if estimates show positive GDP growth, the growth rate will likely be minuscule. In fact, Goldman Sachs just released its Q2 forecast for GDP growth for Q2 – and it’s just 0.7%.
In economic conditions like these, investors are looking for companies that can maintain revenue growth, and Verizon (NYSE:VZ) has that potential thanks to its scheduled new 5G rollout.
5G Rollout Builds Momentum for Verizon
Customer adoption of Verizon’s new 5G network is high. The company expects to have 175 million 5G customers by the end of this year.
That would be a 55% increase from the 113 million network users it had at the end of Q1.
Add these 5G growth numbers to the company’s growing Consumer Group revenues, and a strong recession play candidate emerges. Verizon’s (NYSE:VZ) Consumer group revenues reached $25.3 billion, an increase of 10.9% year over year.
The growth was mainly due to strong wireless service growth and the recent acquisition of TracFone Wireless, a prepaid wireless brand.
Many analysts are so optimistic about what is happening at Verizon (NYSE:VZ) that they expect the company’s shares to increase even if, as expected, the company reports a slight decrease year over year in per-share earnings on Friday.
It’s true, Verizon (NYSE:VZ) is expected to report earnings of $1.33 per share in normalized EPS for Q2, which would be a 3% year-over-year decline.
However, analysts believe the positive news surrounding the company’s 5G rollout and adoption and the company’s traditionally strong free cash flow (FCF) could overcome that bit of negative information and send shares higher.
How Strong is the Company’s Cash Flow Situation?
Verizon (NYSE:VZ) produced $1 billion in free cash flow in Q1 of this year – a decrease of $4.2 billion year over year. However, that year-over-year decrease was attributable to a $2.9 billion reduction in operating cash flow (OCF). The OCF decrease was related to supply chain issues that created higher inventory levels.
Going forward, Verizon expects to see its FCF stabilize thanks to it solving the supply chain issues and the ongoing adoption of its 5G network increasing. As a result, one analyst says he expects “the telecom may generate up to $25B in free cash flow in FY 2023.”
In FY 2020, Verizon (NYSE:VZ) reported an FCF of $23.6 billion. The company reported $19.3 billion of FCF in 2021 during the height of the pandemic.
In other words, the company has always had, and projects to continue to have, strong FCF.
Especially considering that its fiscal year 2022 forecast calls for 9 to 10% growth in wireless service revenues.
That growth engine is expected to then power Verizon (NYSE:VZ) to marginal consolidated top-line growth of 2% to 3% annually over the course of the next five years.
So with a 5G rollout underway and accelerated adoption of new products and services by consumers … the company’s future looks bright even in what could be a dire economic situation.
That’s Why Many are Identifying Verizon (NYSE:VZ) as a Strong Recession Play
It has the telecom assets and the predictable cash flow to remain strong even in a recession. Plus, Verizon shares have a 5% yield, with the company raising its dividend each year. That’s another good sign for investors.
As for risks, the main factor that could limit Verizon’s (NYSE:VZ) growth in the future and decline its margins would be increased competition in the 5G marketplace.
Featured Image: Megapixl @Thodonal
