Is Verizon a Buy?
Shares of Verizon (NYSE: VZ) have easily outpaced the S&P 500 index this year, as the wireless company continues to add new subscribers and posts positive progress on its future growth initiatives. Some Wall Street analysts have responded by downgrading the stock, most notably at JPMorgan Chase, where analysts pegged Verizon stock at "neutral" while upgrading the downbeat AT&T (NYSE: T) to "overweight."
It's true that the two telecom stocks have been on divergent paths as of late, due in large part because of Verizon's better execution and growth. But is Verizon really that bad of a deal after its outperformance this year? While a repeat may not be in the cards in the year ahead, I maintain that Verizon is still a good bet on the wireless business and its future.
Telecom just got a lot more interesting
After spending a couple of years acquiring media assets like AOL and Yahoo! -- businesses that will now be given the cash cow treatment rather than that of growth vehicles -- Verizon has returned its primary focus to its mobile network. The last couple of years, America's largest telecom has been dumping money into acquiring and building assets to support the new 5G network. Examples include the acquisition of XO Communications for its fiber-optic network and Straight Path Communications for its spectrum holdings that make wireless 5G connections possible.
The initial fruits of the organization's labor were realized on Oct. 1 with the launch of the first 5G service, a broadband internet service replacement dubbed 5G Home. It's only available in four cities so far, but Verizon has said it's pleased with the results and plans on aggressively expanding to more markets in 2019. Mobile 5G for smartphones is also on the way.
The next-gen network is exciting because it's not just for phones; it's being promised as the backbone of future technologies like smart cities, autonomous vehicles, connected industrial equipment, and new entertainment formats like virtual and augmented reality. An ambitious project like this doesn't happen overnight, though. 5G is going to take years to deploy, so it could take some time for Verizon shareholders to begin seeing financial benefits. Nevertheless, removing future initiatives from the equation, Verizon is still demonstrating it's worth investors' time.
To buy or not to buy?
Until 5G really gets rolling, we'll still be living in the age of 4G. On that front, Verizon is executing well as it steadily adds new subscribers to its network -- in spite of fierce competition from Verizon, AT&T, and T-Mobile US (NASDAQ: TMUS):
Verizon carries a much higher price-to-free-cash-flow valuation than its other big telecom peer AT&T -- though it's still far cheaper than the smaller and faster growing T-Mobile. In the bread-and-butter retail mobile postpaid subscriber metric (which ultimately helps drive free cash flow higher, as more subscribers means a more profitable mobile network), Verizon and T-Mobile's higher valuations versus AT&T's makes sense. Verizon inhabits the middle ground, besting its next biggest rival but trailing the expansion rates of its smaller peer. It's also worth noting that Verizon's price to free cash flow ratio has been falling this year after free cash got a big boost due to U.S. corporate tax reform passed at the end of 2017.
Rising subscribers and the big tax break makes Verizon stock a good value, assuming it can maintain its slow and steady pace of net retail additions while waiting for the 5G business to start cranking out results. Along the way, investors get treated to a dividend that is currently yielding 4%. That compares to no payout at T-Mobile, and a 6.4% yield from depressed shares of AT&T -- which has struggled since its pricey acquisition of Time Warner earlier this year.
Though they aren't the bargain they were when 2018 started, shares of Verizon look like a good bet on the future of mobility, while the company doles out regular paychecks to shareholders. In spite of the recent downgrades from Wall Street analysts, there's no reason to scoff at owning a piece of America's largest telecom.
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Nicholas Rossolillo and his clients own shares of JPMorgan Chase and Verizon Communications. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.