This Communication Stock Makes For a Strong Income Investment

VZ - Verizon

Verizon Communications is a diversified communication technology company in the world. It provides communications, information and entertainment products and services to consumers, businesses, and government agencies.

Verizon has a worldwide presence and offers voice, data, and video services and solutions. Verizon’s reportable segments are Consumer (~70% of 2019 revenues) and Business (more than 20%). It is the largest wireless service provider in the U.S. by retail connections and revenue. Verizon’s media group includes popular brands like Yahoo, TechCrunch, and HuffPost. The company’s operating structure focuses on three customer-facing areas: consumer, business, and media. 

Verizon caters to nearly 94 million retail connections in consumer and 28 million retail connections in business groups. The company provides consumer-focused wireless and wireline communications services and products to businesses and consumers. It also provides video and data services, corporate networking solutions, voice services, and network access to businesses; and wireless equipment to consumers. In the Consumer segment, Verizon maintains high-quality retail postpaid customers, while its business segment comprises of business and government customers across the U.S.

Investment Data

Revenue Growth & Market Exposure

Verizon has been transforming over the years through high-performing networks and is focusing on fulfilling the customers’ needs in the new digital world. As a global leader delivering innovative communications and technology solutions, Verizon is also developing business models for the emerging IoT market. Consumers trust the Verizon network for its fast speed and network coverage. Verizon is already an established leader in 4G LTE wireless networks with more than 90 million postpaid connections regularly contributing to monthly revenues. The company continues to lead in 4G LTE performance while building momentum for the 5G network. Verizon’s infrastructural capabilities like fiber, real estate, millimeter-wave spectrum, small-cell infrastructure are key ingredients for the 5G network. Verizon’s 5G is now available across more than 30 U.S. cities. The company continues to invest in wireless networks, high-speed fiber, and other advanced technologies to gain an edge over the competition.

Verizon delivered solid Q1 results, despite tough times amid COVID-19 pandemic. In the latest quarter, the company witnessed strong growth in wireless service revenue, a 5% growth in adjusted earnings including the impact of COVID-19 and a 26% higher cash flow. Its media business experienced a decline in advertising and search revenue and it also saw a slowdown in 5G which was expected to ramp up by this time. On the plus side, Verizon saw wireless data surge 9% and Video increase by 40% but total revenues declined in the quarter. It witnessed strong demand for mobility, Jetpacks, VPN services, and high-speed circuit capacity driven by strong demand from businesses. Growth in both consumer and business wireless service revenue was offset by declining equipment revenue. 

Verizon is focusing on the expansion of its fiber, mobile networks, and 5G, and is avoiding costly investments in streaming and digital content, unlike its peers. It recently acquired Blue Jeans Network (Verizon Business Group), a provider of encrypted video conferencing for corporate, telehealth services, online education tools, and remote work applications. This coupled with the company’s 5G network can be an immense value-addition for Verizon’s clients. 

For full-year 2020, Verizon is expecting headwinds from the deferral of commission expense to be $0.09. It also wrote off $228 million in the quarter as bad debt and increased CapEx guidance focusing on establishing robust networks.

Dividends

Verizon is a Dividend Achiever. The company has successfully reduced its payout ratio in recent years to 52% currently. The stock has an annual dividend yield of 4.2%, not as attractive as AT&T’s at 7%. Verizon has compounded its dividend growth at a rate of 3% CAGR over the last decade and last raised its payout by more than 2%. 2019 marked the 13th year of a consecutive dividend increase. Its stock price has also more than doubled in the last 10 years. 

The wireless segment is Verizon’s largest cash flow generator. The company continued to generate huge cash flows during the last quarter, enough to cover its dividends and high capital expenditures. It has a safe level of leverage with $7 billion in cash, nearly $10 billion in a committed credit facility, and short-term debt maturities.

The world today runs on high-speed data. With its own 5G technology in place, Verizon has the first-mover advantage to ride the speed. 5G is the future growth driver for Verizon. The company continues to work with other technology partners to further advance 5G technology. Strong industry position in both 4G and 5G networks has strengthened Verizon’s status as a strong network leader. Focus on customer satisfaction, network performance, and innovative leadership are other driving forces for earnings growth. 

Verizon should be less affected by the pandemic given that its core telecommunications and internet business is generally recession-proof as people will need to be connected both on the personal and professional levels. The company has guided 2020 EPS growth of (2)%- 2% considering the virus impact, so far.

Competition

The communications industry is highly competitive. Verizon competes with national and regional wireless service providers, wireless resellers and cable companies, as well as other communications and technology companies in the U.S. In its wireline business the company faces intense competition from cable companies, wireless service providers, domestic and foreign telecom providers, satellite TV companies, etc. Network leadership, strong customer focus, and sheer scale and size make Verizon the undisputed leader in the U.S. AT&T is the company’s biggest competitor. Verizon’s media business competes with other online search engines, advertising platforms, digital video services, and social networks. High-quality customer base and networks differentiate Verizon from its competitors.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
NYSE:VZVZVerizon Communications Inc.Communication ServicesCommunication Services0.6354.71226.3912.3223.664.440.04504.500.554142.460.069058Standard BusinessNOYESNONOUSA1
NYSE:TTAT&TCommunication ServicesCommunication Services0.6428.31201.7114.3623.661.970.07357.351.055842.080.095367Standard BusinessNOYESYESNOUSA1
NASDAQ:CMCSACMCSAComcast CorporationCommunication ServicesCommunication Services0.7935.92163.9414.2323.662.520.02562.560.365140.920.158696Standard BusinessYESNONONOUSA1
NYSE:AMTAMTAmerican Tower CorporationCommunication ServicesCommunication Services0.42229.58101.7753.7123.664.270.01881.881.011744.320.222063Standard BusinessNONONONOUSA1

Bottom Line

A slowdown in the U.S. economy and reduced household incomes may affect Verizon’s mobile, broadband and entertainment services going forward. There could be a downside risk of consumers and small businesses no longer being able to pay for Verizon’s services. The company might feel COVID-19 related impact on account of higher bad debt expense as well. 

VZ vs Indexes 2020

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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