In a world clouded by high valuations and tiny shareholder yields, Verizon Communications (NYSE:VZ) shines through with its 6.7% dividend yield. The company’s wireless equipment revenue could soon surge if consumers decide to upgrade their iPhones. With capital expenditures expected to collapse in 2024 and beyond, the stock could continue to rebound. Therefore, I’m bullish on Verizon.
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It seems like nobody on Wall Street likes telecom stocks. But if you are bullish on AI, large language models, the Metaverse, and cloud computing, why not be bullish on America’s reliance on connectivity and Verizon’s pricing power?
Verizon’s Resilient Competitive Position
Verizon’s competitive position underpins its revenues. So, how does Verizon stack up against the competition? Let’s dive in.
To understand where Verizon’s going, let’s first have a look at where it’s been. Going into a world of 5G, Verizon had the best network in the United States. With its leading 4G coverage, the company won the J.D. Power award for network quality 31 times in a row. Verizon’s reputation for quality meant it had the profitability to invest heavily in 5G, and it locked in very low interest rates in 2021 to do so.
If we fast forward to today, Verizon has simply outspent competitors on its 5G network. It won the J.D. Power award again for the 32nd time (with the least network problems across all regions), and it was awarded the most reliable 5G network by RootMetrics. While T-Mobile (NASDAQ:TMUS) has tried to sell consumers on its leading 5G coverage (at 53.79%), this is often low-band 5G in rural areas. Consumers may barely notice the difference between low band 5G and Verizon’s leading 4G network (covering 70% of the United States).
So, is having the leading position in 4G coverage and the best 5G reliability enough? Maybe not, but Verizon also has a competitive advantage with its Ultra Wideband 5G and fixed wireless access. Verizon has deployed Ultra Wideband in major cities, and it is apparently capable of delivering 5G speeds that are 10 times faster than other networks.
Lastly, in my opinion, the company has had the preeminent position in fixed wireless internet, which is growing rapidly. Just have a look at Verizon’s fixed wireless access adds below (in grey).
Also, notice that Verizon’s losses in prepaid and postpaid phone net adds are shrinking year-over-year. It looks like Verizon has been increasing its prices, resulting in some of its lower-margin, or to poke some fun, “cheapskate” customers, leaving. However, what matters at the end of the day is revenue, which leads to profitability.
Revenue Could Surge
I believe Verizon’s revenue is about to head higher. In Q1 2024, Verizon’s total wireless service revenue grew 3.2% year-over-year, supported by a strong competitive position. If we begin to see a rebound in Verizon’s wireless equipment revenues (the sale of smartphones, tablets, and other devices, which were down last year), Verizon may soon return to respectable revenue growth. I see Apple’s unveiling of exciting new AI features as a positive on this front. A rebound in device sales could drive Verizon’s bottom line.
The Valuation
At a forward P/E ratio of 8.9x, I believe Verizon is too cheap. This gives VZ a forward earnings yield of 11.2%, which more than covers its forward dividend yield of 6.7%.
I think Verizon is attractive compared to the S&P 500 (SPX), which has a P/E ratio of 28x and more cyclical earnings. Also, the S&P 500’s dividend yield is just 1.31%.
Why Verizon Is Recession-Resistant
Verizon’s profitability can be affected by other factors, but recessions typically haven’t been one of these factors. Why is this? Well, internet connection and wireless phone plans are essential to most consumers and businesses. They’re one of the last things people stop spending money on when times get tough. Here’s the evidence: Verizon’s operating cash flow and operating income grew during the Great Financial Crisis of 2008-09 and the COVID-19 meltdown of 2020.
Collapsing Capital Expenditures
I think the investment case for Verizon is fairly simple. The company had to spend a lot on its 5G network, which hurt its balance sheet (to a manageable extent). This, along with rising interest rates, sent Verizon’s stock tumbling. But that spending is now dwindling across the industry, and Verizon is beginning to focus on its profitability. At such a low valuation, this should lead to robust shareholder returns. The stock’s P/E multiple could also re-rate higher as debt is paid down and/or interest rates fall.
As capital expenditures collapse in 2024 and beyond, I believe Verizon will report strong free cash flows. Verizon said, “We anticipate cash requirements for our 2024 capital program to be between $17.0 billion and $17.5 billion.” This is down from $23.1 billion of CapEx in 2022 and $18.8 billion in 2023. Plus, I think the dividend should be well covered, leaving room for debt reduction, which should boost book value per share and earnings per share.
The Risks
Competition is Verizon’s primary risk. Will the industry continue to compete intensely for customers? Will competitors try to outspend each other for market share gains (throwing profitability out the window)? I think these are tough questions to answer. But so far, so good. CTIA, American Tower (NYSE:AMT), and Wells Fargo (NYSE:WFC) combined expect lower industry CapEx in 2024 and 2025.
Investors should also keep an eye on Verizon’s interest coverage ratio (operating income divided by net interest expense), which is currently pretty strong, above 5x. Benjamin Graham, the famed investor who taught Warren Buffett, recommended an interest coverage ratio of 4x or greater for stable companies.
Is VZ Stock a Buy, According to Analysts?
Currently, six out of 13 analysts covering VZ give it a Buy rating, seven rate it a Hold, and zero rate it a Sell, resulting in a Moderate Buy consensus rating. The average VZ stock price target is $44.62, implying upside potential of 12.2%. Analyst price targets range from a low of $39 per share to a high of $52 per share.
The Takeaway
I’m bullish on Verizon and believe it’s one of the top value stocks in the S&P 500. Verizon’s industry-leading 5G reliability, 4G coverage, Ultra Wideband speeds, and fixed wireless internet make it a best-in-class operator. The company’s equipment revenues could soon rebound alongside its wireless service revenue. I see rising revenues and collapsing capital expenditures as a bullish setup for Verizon at a forward P/E of 8.9x.
