Verizon Communications Inc. (VZ, Financial) is a telecom titan that's been in a brutal bear market for well over a year now. The stock is off around 32% over the past year and 41% from its 2019 peak. As shares slumped further into the abyss, the dividend yield gradually swelled. Now at 6.95%, Verizon stock makes for a compelling offering for patient value hunters willing to reach for yield.
To be sure, yield isn't everything. Indeed, Warren Buffett (Trades, Portfolio) once opined that reaching for yield is "stupid."
Though it's a bad idea for income-oriented investors to reach a bit too far for yields, given the risk of dividend cuts and further share price downside, I think there are occasionally opportunities to snag a historically-high yield for a modest multiple. Of course, investors must put in their due diligence before biting on any "deep value" play that promises a larger dividend payment.
After the stock market's latest fit following more hawkish comments from the U.S. Federal Reserve, Verizon stock seems too cheap for its own good.
Verizon's latest quarter had some bright spots
For the fourth quarter of 2022, Verizon delivered some in-line earnings results, with $1.19 in earnings per share (EPS). Most notably, Verizon added 217,000 net postpaid mobile subscribers. Indeed, the fourth quarter saw the most additions of any quarter in 2022. On the front of customer ads, the fourth quarter marked a rather strong end to a rather brutal year.
At this juncture, it's likely too early to tell whether Verizon has reached a turning point. One decent quarter seldom marks the beginning of a reversal in trend.
Top telecom rival T-Mobile (TMUS, Financial) continues to have momentum to its back. It may take a lot more for Verizon to beckon some of the subscribers who may have jumped ship in recent years. For now, Verizon's management is guiding cautiously (non-GAAP EPS of $0.30 for 2023, up from $0.15), and I think they're right to do so with the magnitude of economic headwinds likely lying up ahead.
Undoubtedly, the muted guide is underwhelming for investors hoping to catch the bottom in the falling knife that is Verizon stock. Arguably, I think the cautious forecast makes the stock a less-risky holding. At the end of the day, the odds of surpassing estimates are higher when there's a lower bar. Underpromising and overdelivering is only prudent for a firm that's endured its fair share of stumbles.
Verizon's management team made it clear that it plans to stick by the strategy of targeting profitable subscribers. As the company continues investing in its 5G capabilities, Verizon may be able to take a bit of wind off T-Mobile's back to help spark its own turnaround.
How is Verizon's dividend holding up?
Verizon's dividend has become quite swollen (one lousy day from surpassing the 7% mark again) after sliding around 42% off its peak just north of $60 per share.
Undoubtedly, Verizon doesn't have the same financial flexibility it once had. Operational cash flows for 2022 were down $2.4 billion year over year. Despite the more than $150 billion worth of debt (as of the end of 2022) sitting on the balance sheet, I still view Verizon's dividend as being on some relatively steady ground, but the company doesn't have a lot of room for error. Verizon has what it takes to balance investments and its hefty dividend commitment for now, but I do think its turnaround would be made a heck of a lot easier had it reduced its payout by a modest amount.
Of course, T-Mobile doesn't have to perform the balancing act of keeping the dividend steady while investing in 5G infrastructure, all while the costs of borrowing increase. Regardless, I think a bit of relief is on the horizon for Verizon. Looking ahead, the company's cash flows could begin to improve now that a big chunk of the 5G spending is now in the rear-view mirror.
The dividend has grown at a 2% compound annual growth rate over the last five years. That's nothing to write home about. Still, given the headwinds faced by the company in recent years, I'd argue that 2% is quite respectable. These days, you'd be hard-pressed to get any sort of raise in the labor market!
Final thoughts and valuation
The valuation is the main attraction to Verizon stock, in my opinion, with or without a dividend cut in the future. As of this writing, shares go for a trailing 12-month price-earnings ratio of 7.22. That's cheap, but there's a lot of baggage compared to the likes of a T-Mobile, which can't seem to do any wrong.
Though Verizon cannot seem to catch a break, with shares at risk of revisiting multiyear lows of around $35 per share, I am a big fan of the risk-reward through the next five years. The 5G tailwind is still intact, and I think it's just a matter of time before Verizon can pick its game up again. The fourth quarter was muted, but I saw some bright spots.
