Source: PaxForex Premium Analytics Portal, Fundamental Insight
Verizon, the telecom giant, may seem like an attractive income investment with its impressive dividend yield of 7.6% as of the current date. However, despite reporting second-quarter earnings on July 25, the stock showed little movement and remains close to its 52-week low of $31.25, reached on July 17.
The stagnant stock price raises concerns about investing in Verizon solely based on its high dividend yield. A rising dividend yield can be an indicator of a declining share price, but it's not the sole determinant of a sound investment.
One possible reason for the lackluster stock performance could be news surrounding the company's potential liability related to lead-sheathed cables, which were laid before the 1950s.
Before making any investment decisions based on Verizon's dividend, it's crucial to thoroughly examine the company's current situation and financial health to assess whether it truly represents a worthwhile income investment.
When evaluating Verizon as a long-term income investment, its performance becomes the more crucial factor. One significant aspect to consider is the company's free cash flow, which reflects its ability to sustain dividend payments.
Fortunately, Verizon is performing well in this area. During the first half of 2023, its free cash flow reached $8 billion, showing growth from $7.2 billion in 2022. This positive trend places Verizon in a strong financial position, enabling the company to continue paying dividends, reduce its considerable debt, and invest in its business. This is especially important given the capital-intensive nature of telecom operations, particularly as Verizon undertakes its 5G wireless rollout.
Moreover, Verizon is implementing cost-cutting measures, which are expected to further enhance its cash flow. The company anticipates reducing expenses by at least $2 billion by 2025, which should contribute to the improvement of its financial outlook.
Another positive indicator for Verizon is the increasing revenue in its wireless services segment. During Q2, wireless service sales rose to $19.1 billion, up from $18.4 billion in 2022.
This particular income stream is significant, constituting nearly 60% of Verizon's total Q2 revenue of $32.6 billion. Furthermore, the company expects year-over-year wireless service sales to grow by at least 2.5% in 2023.
The boost in wireless service revenue can be attributed to several factors. Firstly, Verizon has implemented price increases in recent months. Secondly, the company is capitalizing on its high-speed 5G network to offer broadband internet services, which contributes to the continued growth of wireless service revenue.
Verizon's broadband business is experiencing remarkable growth, evident from the 418,000 net broadband additions in Q2 compared to last year's 268,000. Notably, 384,000 of these additions stem from customers opting for internet services through Verizon's 5G network.
The strategic investment in its 5G network allows Verizon to generate multiple income streams. One of these sources is its foray into the private network market. By offering exclusive wireless networks to businesses and governments, Verizon taps into a lucrative opportunity. The US private network market, valued at $3.3 billion in 2022, is projected to grow to $22.8 billion by 2032, providing a substantial long-term growth opportunity for Verizon. Notable customers in Verizon's private network portfolio include the US Department of Veterans Affairs and Cleveland Clinic.
Despite the positive aspects, Verizon does face certain areas of concern. One significant issue is its substantial debt burden. At the end of Q2, the company's unsecured net debt amounted to $126.6 billion, although there has been a reduction from the previous year's $130.6 billion. This reduction indicates Verizon's commitment to debt reduction, which, in turn, enhances its ability to sustain its dividend.
Part of the revenue decline can be attributed to Verizon's shift in customer acquisition strategy. The company is now focusing on attracting high-value customers who are more likely to remain loyal over the long term, rather than relying on short-term promotions that may lead to customer churn once the promotional period ends.
This new strategy is proving to be effective. Verizon's Q2 average revenue per account (ARPA) among postpaid customers increased from $145.50 in 2022 to $154.51 in the current year. Moreover, the Q2 postpaid phone churn rate, which measures customer retention, remained low at 0.83%, consistent with the previous year's rate of 0.81%. This consistency indicates that Verizon is successful in retaining its existing customer base.
Despite these challenges, Verizon boasts an impressive track record of consistently increasing dividends. Last year marked the 16th consecutive year of dividend raises, and the company has been paying dividends annually since 1984.
Given its reliable dividend history, coupled with Verizon's ability to generate free cash flow and explore revenue opportunities from its growing 5G network, the company remains an attractive dividend stock. Although share price appreciation may be gradual as Verizon gradually reduces its debt, it presents a solid income investment opportunity.
While the price is below 34.50, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 33.09
- Take Profit 1: 31.00
- Take Profit 2: 29.50
Alternative scenario:
If level 34.50 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation:short position
- Entry point: 34.50
- Take Profit 1: 36.00
- Take Profit 2: 37.50
