Verizon Stock (NYSE:VZ)
Some people enjoy collecting sports cards, vintage coins, and Dungeons and Dragons. While those are enjoyable pastimes, I prefer to accumulate dividend-paying equities, especially when they are undervalued.
This is because dividends provide an investor with genuine cash flow from which to derive tangible benefits. This brings me to Verizon (NYSE:VZ), which has a current yield of 7.2%.
This yield is useful since it follows the Rule of 72, which is an excellent method for determining when your money will double. Based on this formula, investors’ money may double every ten years (72 divided by 7.2), even if Verizon’s dividend does not expand over time, which I doubt.
I previously discussed Verizon here, observing that it was reasonably priced. In this article, I provide an update on the stock and explain why now may be a great opportunity to invest in this income source at its current deeply discounted price.
Why VZ?
Verizon stock has seen better days, as it is now trading near its 52-week low of $32.79. The stock has dropped 26.6% in the last year, as illustrated below.
The market is understandably anxious about Verizon’s prospects, considering that it lost 263K net consumer wireless postpaid phone customers in the first quarter. This was due to competition from traditional competitors AT&T (NYSE:T) and T-Mobile (NASDAQ:TMUS), as well as cable competitors like Comcast (NASDAQ:CMCSA), which offer their own bundled broadband and phone deals. It should be noted, however, that Comcast does not operate a wireless network and instead uses Verizon’s network through a wholesale agreement.
While the aforementioned drop in postpaid wireless users is worth tracking, overall profitability is a more important statistic. Because, with T-Mobile’s acquisition of Sprint, there are only three big telecom providers left in the game, the other players, including Verizon, have little motivation to launch unreasonable price wars that harm industry profitability.
Verizon’s results were stronger, as it increased wireless service revenue by 3% year on year to $11.9 billion in Q1 and adjusted EBITDA by $1.5 billion to $8.3 billion. Furthermore, business customers are more profitable than consumer customers, and Verizon increased this category by 136K customers, offsetting some of the consumer losses.
Looking ahead, fixed wireless remains a tempting possibility for VZ as it strives to increase its part of the broadband pie. This is reflected in Comcast’s 5,000 net broadband customer additions during Q1, while Verizon achieved 437K total net adds in the same quarter, the largest net adds in over ten years. This was due to a strong increase in fixed wireless users as well as 67K net additions from VZ’s FiOS fiber optic service.
Importantly, VZ is drawing inspiration from its rival, T-Mobile, whose customers are accustomed to convenience and advantages. This is mirrored in Verizon’s recent decision to cut the number of cellphone plans it offers from six to two. It also provides clients with benefits that can equal $50 in monthly savings for a typical family across VZ’s partner network.
Importantly for income investors, VZ now has one of its best yields in history. The dividend yield of 7.2% is fully covered by a payout ratio of 52% and comes with 18 years of straight increase. While the 5-year dividend CAGR is only 2.0%, Verizon might produce a long-term yearly CAGR of 9.2% even without accounting for capital appreciation.
Meanwhile, VZ has a BBB+ credit rating, and its net unsecured debt to adjusted EBITDA ratio is 2.7x, down 0.1x from the previous year. Management also anticipates a reduction in capital investment for the balance of the year, providing it more capacity to pay down debt.
Finally, at the present price of $36.05, VZ appears to be in a deep value zone, with a forward PE of just 7.7, well below its usual PE of 14.3. VZ is priced for a long-term drop in EPS at this pricing, which I do not believe is the case. Analysts have set an average price objective of $44.33, implying a potential 23% gain based solely on price appreciation.
Takeaway for Investors
Overall, Verizon is taking the necessary efforts to remain competitive by simplifying its plans and delivering more appealing incentives to attract and keep customers. They’ve also adopted a more aggressive approach to the fixed wireless sector, which should pay benefits in the form of increased broadband customer growth.
Finally, the stock is trading at a steep discount while delivering a well-covered, historically high dividend yield. As a result, I’m taking advantage of the opportunity to boost my income by adding at present levels, and income investors would be wise to consider Verizon stock at its current deeply discounted pricing.
Featured Image: Freepik @ ksandrphoto
