Verizon stock (VZ) dipped after its Q3 earnings report, trading roughly 7.7% below its 52-week high. While this decline may not seem that substantial, especially since the stock is still up 24.5% over the past year, I believe it offers an attractive entry point. Specifically, Verizon’s investment case seems bolstered following its Q3 numbers, which are fairly solid. In the meantime, the company showed continued deleveraging and sustained dividend growth. Given these factors and its attractive valuation, I am bullish on VZ stock.
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Strong Q3 Results Reinforce Verizon’s Growth Potential
Verizon’s post-earnings dip is likely due to investors taking profits after the stock’s extended rally rather than any disappointing results, in my view. This is because the company’s performance was strong across the board. Specifically, Verizon’s Q3 numbers displayed its stable business model, with revenues landing at $33.3 billion, flat year-over-year, and adjusted EBITDA showing a modest 2.1% increase to $12.5 billion.
The numbers were primarily driven by consumer and business wireless growth, offset by lower equipment sales. Despite the latter, Verizon’s wireless service revenue grew by 2.7% year-over-year to a record $19.8 billion, supported by Verizon adding 81,000 retail postpaid phone customers in the consumer segment and 158,000 in the business segment. Verizon also steadily expanded its wireless retail postpaid phone business customer base. Total wireless retail postpaid phone gross adds grew by 5.1% year-over-year to 2.7 million, showing continued customer acquisition.
Profitability-wise, Verizon’s adjusted EBITDA margin reached a rather impressive 37.5%, up from 36.5% in Q3 last year. This was supported by the industry-leading wireless service revenue growth I just mentioned, indicating stability and customer retention. While a 16.7% spike in interest expenses to $1.67 billion offset these improvements, leading to adjusted earnings-per-share of $1.19, down 2.5% compared to last year, I believe Q3 was a rather robust quarter overall.
Deleveraging and Sustained Dividend Growth
Another factor contributing to my bullish stance on Verizon stock following its Q3 results is the telecom giant’s continued deleveraging and sustained dividend growth. At the end of the quarter, Verizon’s net debt stood at $169.2 billion, down from $175.8 billion in the previous quarter. Its net debt to Last-12-Month (LTM) EBITDA also stood at 2.5X, improving notably from 3.2X at the end of Q2. The massive debt load remains a risk, but it looks like Verizon is actively managing its leverage.
Along with paying down debt, Verizon also increased its dividend by 1.9% in Q3, now boasting a 20-year streak of annual dividend hikes. Although this recent raise may seem underwhelming, as it came below inflation, the 6.02% yield today remains attractive for income-focused investors. This is particularly true considering Verizon’s healthy payout ratio, which is 59% based on the consensus EPS estimate of $4.60 for the year.
Verizon’s Valuation Remains Attractive
Besides the broad improvements in Verizon’s investment case, I like the stock today as it trades at a cheap valuation despite this year’s prolonged rally. Shares are now trading at 9.1 times this year’s expected EPS, forming a compelling opportunity when factoring in its steady, low-single-digit EPS growth potential. For context, AT&T (T) trades at 10.0 times its consensus EPS estimate for FY2024, while T-Mobile (TMUS) is trading at a much more expensive multiple of 25 times, although its growth prospects are admittedly much brighter.
Since many stocks are trading at elevated valuations, Verizon remains a defensive play at its current levels. This is due to the essential nature of its offerings, reliable cash flows, and tangible capital returns that have grown steadily over the years. For this reason, I believe the stock is positioned to outperform if the market experiences a correction from recent highs.
Is VZ Stock a Buy, According to Analysts?
Turning our attention to Wall Street, Verizon Communications has sustained a Moderate Buy consensus rating based on eight Buys and ten Holds assigned in the past three months. At $46.47, the average VZ price target implies 12.30% upside potential.
If you’re uncertain which analyst you should trust if you want to buy and sell VZ stock, consider Michael Rollins from Citi (C). He is the most accurate and profitable analyst covering the stock (on a one-year timeframe), with an average return of 13.83% per rating and a 92% success rate. Click on the image below to learn more.
Takeaway
In summary, I believe that Verizon’s recent dip presents an intriguing opportunity for investors looking for stability and value in a high-priced market environment. With solid Q3 results once again reminding us of the defensive attributes of its business model and steady growth in the wireless sector, Verizon displayed resilience. In the meantime, the company’s continued focus on reducing its net debt and commitment to dividend growth boost its investment appeal. In fact, despite the stock’s prolonged rally pushing the yield lower, it remains attractive at 6.5%, while Verizon offers investors a reliable income stream backed by 20 years of successive dividend increases. Therefore, I am bullish on VZ stock.
