Verizon’s Big Share-Price Drop Opens Opportunity for 6.8% Dividend Yield

Image: Verizon’s shares have been punished, but this has opened an opportunity for a 6.8% dividend yield. Image Source: TradingView

By Brian Nelson, CFA

When Verizon (VZ) reported third-quarter results in late October, the company’s revenue advanced 4% on a year-over-year basis, exceeding the consensus estimate, while non-GAAP earnings per share came in at $1.32 per share, beating the consensus estimate by a few pennies, but down slightly on a year-over-year basis. Adjusted EBITDA fell 0.4% from the same period last year.

Verizon is one of the leading communication service providers in the world, and its operations span data, video and voice services across its networks and platforms. The company’s two reportable segments, Verizon Consumer Group and Verizon Business Group, are as follows, per its recent 10-K:

Our Consumer segment provides consumer-focused wireless and wireline communications services and products. Our wireless services are provided across one of the most extensive wireless networks in the United States (U.S.) under the Verizon brand and through wholesale and other arrangements. We also provide fixed wireless access (FWA) broadband through our wireless networks. Our wireline services are provided in nine states in the Mid-Atlantic and Northeastern U.S., as well as Washington D.C., over our 100% fiber-optic network through our Verizon Fios product portfolio and over a traditional copper-based network to customers who are not served by Fios. On November 23, 2021, we completed the acquisition of TracFone Wireless, Inc. (Tracfone), a provider of prepaid and value mobile services in the U.S.

In 2021, the Consumer segment’s revenues were $95.3 billion, representing approximately 71% of Verizon’s consolidated revenues. As of December 31, 2021, Consumer had approximately 115 million wireless retail connections, approximately 7 million wireline broadband connections, which includes Fios and Digital Subscriber Line (DSL) internet connections, and approximately 4 million Fios video connections.

Our Business segment provides wireless and wireline communications services and products, including data, video and conferencing services, corporate networking solutions, security and managed network services, local and long distance voice services and network access to deliver various Internet of Things (IoT) services and products. We also provide FWA broadband through our wireless networks. We provide these products and services to businesses, government customers and wireless and wireline carriers across the U.S. and select products and services to customers around the world.

In 2021, the Business segment’s revenues were $31.0 billion, representing approximately 23% of Verizon’s consolidated revenues. As of December 31, 2021, Business had approximately 27 million wireless retail postpaid connections and approximately 477 thousand wireline broadband connections, which includes Fios and DSL internet connections.

The company’s Wireless service revenue increased 10% on a year-over-year basis during the third quarter, generating postpaid phone net additions of 8,000. Total broadband net additions came in at 377,000 in the third period, including 342,000 fixed wireless net additions. The pace of broadband net additions and fixed wireless net additions accelerated from the sequential second quarter. Here’s what CEO Hans Vestberg had to add about the quarter:

We took a number of actions in the third quarter that helped drive improved operational and financial performance, but we know there’s still more work to be done. The pricing actions we took earlier this year, as well as our new cost savings program, show that we are being deliberate and strategic in our decisions to strengthen our business. At the same time, we are focused on executing our 5G strategy, as we are covering every major market and accelerating our C-Band network build. We are on track to reach 200 million POPs within first-quarter 2023. 

Verizon’s cost structure remains a key focus. The company’s new cost savings program is expected to further reduce annual costs between $2-$3 billion by 2025. Though net income faced pressure during the third quarter, year-to-date operating cash flow came in at $28.2 billion, down from $31.2 billion in the same period last year. Capital expenditures of $15.8 billion put free cash flow in the period at $12.4 billion–not too poor of a showing but readers should nonetheless take note of the decline (see image below).

Image: Verizon remains a strong free cash flow generator, but its total debt is enormous. Image Source: Verizon

Aside from the immense competitive pressures inherent to the telecom industry, Verizon also holds a considerable net unsecured debt balance of $129.3 billion, which translates into a net unsecured debt-to-adjusted EBITDA ratio of 2.7x at the end of the quarter. Though we tend to like income ideas with hefty net cash positions, in many cases, many high yielders instead have large net debt positions, which pressure their equity values within the capital stack, and thereby–almost by default–drive the high dividend yield. 

Looking ahead, Verizon reiterated its full-year 2022 outlook. The company expects wireless service revenue growth of 8.5%-9.5%, adjusted EBITDA growth of flat to down 1.5% and adjusted earnings per share of $5.10-$5.25. Capital expenditures, including outlays related to Verizon’s C-Band network, are expected in the range of $21.5 billion to $23.5 billion for the year.  

Concluding Thoughts

Image: Verizon has strung together 16 consecutive years of dividend increases. Image Source: Verizon

With Verizon’s dividend hike to $0.6525 per quarter in September this year, 2022 has marked the 16th consecutive year of a dividend increase. Shares yield ~6.8% at the time of this writing. Though we wouldn’t be looking to add Verizon’s shares to the simulated Best Ideas Newsletter portfolio or simulated Dividend Growth Newsletter portfolio at this time, it may be worth a look for high yield and income investors. Its big share-price drop has made its dividend a head-turner.

Tickerized for holdings in the IYZ.