Source: PaxForex Premium Analytics Portal, Fundamental Insight
Dividends serve as an excellent avenue for generating supplementary income beyond your primary employment, particularly during retirement. Countless individuals rely on these periodic payouts to manage their expenses or to indulge in life's little luxuries.
The realm of high-yield stocks, exemplified by Verizon Wireless, is a contested domain among income-focused investors. This stock garners significant attention and elicits strong opinions from many. However, when it comes to investing, it's crucial to set aside emotional biases and concentrate on the most efficient means of achieving your financial objectives. Can Verizon claim that role?
Presently, Verizon boasts a dividend yield of 7.8%, a figure that undeniably holds allure. Few equities provide such substantial returns. Nevertheless, one should not base stock selection solely on dividend yield. The venerable financial writer Raymond Devoe once articulated in The Wall Street Journal that "more losses have been incurred in pursuit of high yield than at the barrel of a gun." While this notion lacks definitive proof, it certainly holds merit.
As I've emphasized previously, the growth of dividends carries greater significance than the immediate yield. A compelling illustration of this lies in a comparison between Verizon's impressive yield and the remarkable growth exhibited by Texas Instruments. The stock of Texas Instruments currently yields just under 3%, aligning with its historical norms. A decade ago, Verizon yielded over 4%, whereas Texas Instruments yielded merely 2.4%. Despite this disparity, Texas Instruments emerged as the superior investment.
The trajectory of Texas Instruments' free cash flow growth has enabled it to elevate dividends for an unbroken streak of 19 years, reflecting an increase of more than 300% over the past decade. In contrast, Verizon's growth stands at 23%.
Due to the disparity in dividend growth, the current yield an investor would have on the initial purchase price of these stocks from a decade ago stands at 12.5% for Texas Instruments and a mere 5.3% for Verizon. However, this isn't the only contrast. Texas Instruments' stock has also undergone significant appreciation, affording investors a remarkable return of over 445%, compared to a modest 9% for Verizon.
In the context of inflation, holders of Verizon stock have experienced value erosion, and the magnitude of opportunity costs is substantial.
Now, let's consider the prospect of investing in Verizon at present. On the surface, telecommunications companies appear to be promising investments. Given the near-universal usage of mobile phones and the limited number of carriers, the appeal is evident. Yet, a dual challenge arises. Firstly, as previously mentioned, the vast majority of potential users within Verizon's exclusively domestic market are already utilizing mobile phones. This lack of a burgeoning base of new customers means that major phone carriers must fiercely vie for the existing market share.
Consequently, their pricing power weakens, and avenues for growth diminish. Indicators reflect this scenario, as Verizon's operating income exhibited a year-over-year decline of 6% in 2022, remaining relatively stagnant during the initial half of 2023, while overall revenue witnessed a 3% downturn.
Secondly, the nature of the telecommunications industry demands substantial capital investment. This translates to a considerable outlay on assets and equipment (CapEx), an expense not immediately reflected on the income statement, but one that significantly diminishes free cash flow — the funds available for purposes such as dividends. Owing to this dynamic, Verizon has amassed substantial debt over time, currently totaling $153 billion in long-term liabilities, including $15 billion due within the next 12 months.
This framework is not conducive to fostering growth, ensuring sustainability, or reaping rewards for investors. While the yield may be appealing, the overall return is likely to lag behind both the broader market and dividend growth-oriented stocks like Texas Instruments. Furthermore, with the backdrop of rising interest rates, investors have the option to invest in risk-free Treasury bills that yield more than 5%.
In the fiscal year 2022, Verizon generated $37 billion in cash from its operational activities; however, it allocated $29 billion toward Capital Expenditures (CapEx), licenses, and collateral. Meanwhile, dividends disbursed amounted to $11 billion. The arithmetic is straightforward: Verizon's free cash flow fell short of covering the dividend, leading to the necessity of incurring additional debt. This trend was even more pronounced in 2021, and the pattern has remained analogous thus far in 2023.
During the second-quarter earnings call of 2023, the management explicitly stated that their primary focus revolves around reinvesting in the business and safeguarding the dividend. Given that a reduction in dividends could potentially adversely affect the already struggling stock price, Verizon is unlikely to initiate such a move unless compelled. Nevertheless, the financial landscape is marked by tight constraints, leaving room for the possibility that unexpected challenges could force their hand. Owing to the management's commitment, an imminent dividend reduction seems improbable; however, it's not entirely implausible.
To distill the situation: While Verizon's alluring yield holds appeal, it also carries substantial risk, particularly as the risk-free interest rate experiences an upward trajectory. Income-oriented investors should contemplate alternatives such as dividend growth stocks, Treasury bills, and Certificates of Deposit (CDs). As evident from the analysis provided earlier, Texas Instruments might present itself as a more prudent option.
As long as the price is below 35.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 33.00
- Take Profit 1: 32.00
- Take Profit 2: 30.00
Alternative scenario:
If the level of 35.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 35.00
- Take Profit 1: 36.00
- Take Profit 2: 37.00
