Is Verizon Still a Buy?
Verizon (NYSE: VZ) is the largest domestic wireless network, providing coverage to almost 118 million customers. In the United States, the company primarily competes with the three other national mobile networks -- AT&T, T-Mobile, and Sprint -- although a potential T-Mobile/Sprint merger could soon consolidate some competition.
There are several reasons investors might want to consider a position in Verizon. It's like a utility that benefits from steady subscriber income (consumers would have to come upon some pretty hard times before canceling their cellphone service), the stock pays a nice dividend, and the prohibitive cost to building out a nationwide mobile network makes it unlikely that a new competitor will enter the market anytime soon.
But because building a national network is so expensive, Verizon finds itself in a lot of debt -- currently almost $114 billion. Also, since the U.S. smartphone market is saturated, any growth the wireless network giant sees is slow and only comes at the expense of its existing competitors, often through costly price wars. Let's take a closer look at the company to see if it's still a good investment.
Crunching the numbers
In Verizon's 2019 first quarter, total revenue rose to $32.1 billion, a 1.1% increase year over year, and its adjusted earnings per share grew to $1.20, a 2.6% increase over 2018's first quarter. The company also raised its 2019 full-year adjusted EPS guidance, now expecting it to rise by low single digits over 2018, whereas before the company had projected it to be flat. While the guidance is inexact, this puts Verizon's forward P/E ratio in the neighborhood of 12, an attractive valuation to be sure.
Verizon is best known as a dividend stock because it supports a high dividend yield. The stock price currently sports a dividend yield of just over 4%, making it ideal for investors looking for a steady stream of income.
5G, Verizon's biggest opportunity
The biggest driver of growth in Verizon's future remains the promise of 5G, which gets its name from the fact that it will be the fifth generation of wireless networks. 5G will bring faster wireless speeds, lower latency (the delay between wireless signals sent and received), and higher data volumes. Verizon has invested heavily in 5G technology across its markets and has already launched a limited introduction in parts of Chicago and Minneapolis. By the end of the year, the company promises to launch 5G coverage in 20 additional cities.
In Verizon's first-quarter conference call, CEO Hans Vestberg stated:
Is Verizon's debt a problem?
Verizon remains a highly leveraged company, with almost $114 billion of debt on the balance sheet, the vast majority of which is unsecured. As high as that amount is, it is down about $5 billion from last year's first quarter. CFO Matthew Ellis said that Verizon's efforts to pay down its debt have not gone unnoticed and that two credit rating agencies had put Verizon "on positive outlook for a potential upgrade" to its credit rating. Vestberg added that evening out the balance sheet remained one of the company's top capital allocation priorities, behind only investing in its network and rewarding shareholders with dividends.
The company is also exploring other ways to pay down debt, including selling assets in Verizon's broader portfolio that might no longer be a proper fit. For instance, in early May, Verizon began exploring a sale of Tumblr, its struggling blogging website.
A solid investment
Verizon may never again see top- or bottom-line double-digit growth. Smartphone penetration in the U.S. has essentially leveled off, with most everyone who wants a wireless subscription already owning one.
This doesn't mean, however, that Verizon should not be in investors' portfolios. Verizon's dividend is well supported by earnings and, at a 4% yield, is much higher than that of most other stocks. In bull markets featuring solid economic growth, the stock might very well lag the broader S&P 500 index. In bear markets, however, when consumer spending contracts, Verizon will probably fare far better than the index, with consumers almost as reluctant to cut spending on their wireless plans as they would be to cut spending on electricity.
Every portfolio can use a little ballast, something that provides balance during the market's ups and downs. This is why Verizon is in my own portfolio and why it might still be a good fit for yours.
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Matthew Cochrane owns shares of Verizon Communications. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.