Source: PaxForex Premium Analytics Portal, Fundamental Insight
Shareholders of the U.S. telecommunications titan Verizon Communications have had a very difficult year. Normally a defensive stock that is not too volatile, Verizon has fallen 40% from its highs and has fallen more than the S&P 500 in 2022. The company pays an impressive dividend with a yield of 7% at today's share price, which is a pretty attractive payout for dividend investors.
So what's going on? We take a look at Verizon's problems to determine whether investors should worry about Verizon's dividend checks not being redeemed anytime soon. Finally, buying stock is a decision that may depend on your situation.
The telecommunications industry in the U.S. is an oligopoly, which suggests that a tiny group of companies dominates the market. In this case, Verizon, AT&T, and T-Mobile US serve the majority of wireless users. You can compare these companies to see how well they work with each other. Most consumers in America have cell phones and will switch from one carrier to another over time.
The drop in Verizon's stock price can be traced to how the company has struggled with subscriber growth during this year. After nine months, Verizon lost 16,000 wireless customers in 2022. So where did they go? To competitors. AT&T added 1.7 million net subscribers and T-Mobile added 1.1 million over the same time period. AT&T and T-Mobile are adding more than Verizon is losing, so it's not all at Verizon's expense. What is clear, however, is that people are not choosing Verizon, whether they are switching from a discount carrier or one of the big three, or just being new cell phone users.
Wireless networks are price competitive, so subscriber growth plays an important role in driving revenue growth. Verizon's slowing subscriber growth may bode poorly for future growth and is probably one of the reasons why the company's stock has lost traction on Wall Street.
Verizon is not a fast-growth company, but it generates huge cash profits that provide generous dividends. The superannuation, currently at 7 percent, is an important explanation many investors own the company's stock. Verizon has raised its dividend for 18 years in a row and seems intent on continuing to be a dividend aristocrat.
Even that year, when operating profits fell from $31.2 billion to $28.2 billion and increased capital spending further reduced free cash flow, Verizon had $4.3 billion in cash left after paying the dividend.
Investors should keep an eye on whether free cash flow will continue to decline in future quarters, but the dividend does not seem to be threatened at this time. So you can sleep easy with a 7% yield on this stock in your portfolio.
Whether VZ is a buy today depends on your situation. For example, investors looking to get the most out of their investments may buy Verizon because of its well-funded dividend. But it's a more complicated question if you're looking for total return, which includes share price appreciation. Verizon trades at a price-to-earnings (P/E) ratio of just 8, well below the typical valuation of the last decade (P/E 13).
That would leave room for solid investment gains if market sentiment toward Verizon strengthens and pushes the valuation up. However, this is unlikely to happen without the company's subscriber growth getting back on track. If you're trying to invest your money in the best opportunity for total return, there may be better options in a market where everything is for sale.
As long as the price is below 40.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 37.07
- Take Profit 1: 35.00
- Take Profit 2: 30.00
Alternative scenario:
If the level of 40.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 40.00
- Take Profit 1: 43.00
- Take Profit 2: 46.00
