Is Verizon Communications a Buy?

Find out if investors should jump on this mature telecom giant with a dividend yield over 4%.

Demitrios Kalogeropoulos
Demitrios Kalogeropoulos
Aug 17, 2018 at 1:30PM
Technology and Telecom

It's a huge company in a mature industry, and so investors have only modest expectations about Verizon Communications(NYSE:VZ) long-term growth prospects. However, the telecommunications giant benefits from several financial and competitive advantages that could make it a tempting buy, depending on your portfolio preferences.

Below, we'll look at the main reasons to consider adding Verizon to your watchlist, along with a few factors that suggest you might want to put your cash to work elsewhere.

A man points a smartphone towards a cell tower.

Image source: Getty Images.

Can you hear me now?

Verizon's core business is its wireless service segment, and that division has logged modest sales declines in each of the last two years. The unit has faced several industry headwinds lately, including price competition from rivals, a mature smartphone market, and the transition away from subsidized phone sales.

Verizon has succeeded at keeping its subscriber footprint inching higher through these challenges, but they're still affecting results. Its average monthly revenue per user, for example, has declined, and overall profitability in the wireless segment hasn't improved since 2016.

Verizon's wireline business is enjoying stronger results. Sales were up overall last year thanks to the popularity of its FiOS broadband internet and video services. Expenses have declined in this area, too, which has helped raised profitability to 21% of sales, from 18% two years ago.

Looking ahead

Management is predicting slightly faster sales and profit growth for the 2018 fiscal year, and executives lifted that forecast a bit after higher equipment sales helped second-quarter results. Verizon's long-term gains will depend on its ability to make its service consistently stand out from rivals. The company believes its digital content strategy could help in this regard, but it is placing its biggest bet on its data network.

Specifically, Verizon plans to spend as much as $17.9 billion on maintaining and upgrading that digital infrastructure this year, including by rolling out its 5G wireless network. Executives describe the strategy as "doubling down on network superiority," and they hope it will lead to more customer gains, higher satisfaction levels, and increased pricing as the volume of internet-connected devices soars. Investors can watch those metrics over the next few quarters for signs that Verizon's modest growth plan is working.

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Dividend and cash flow

To balance out that slow growth outlook and high capital spending need, Verizon shareholders can count on significant dividend income to boost their returns. In fact, the stock is the single highest-yielding member of the Dow, with shares paying over 4.5%.

Verizon's last annual increase was 2.2%, and the dividend appears well covered by cash flow. That buffer should protect income investors from surprise cuts or pauses to annual increases, although it's worth noting that the company's streak of yearly raises only goes back 11 years, to 2007.

In a few ways, that market-thumping dividend yield tells investors much of what they need to know about this stock. After all, buying Verizon shares today exposes you to a business with limited upside potential that's largely tied to the company's aggressive capital spending requirements.

Cost cuts and improving customer satisfaction should help it achieve higher revenue and earnings that are growing more quickly, which in turn will support aggressive direct shareholder returns. But if you prize growth over stable cash flow and dividend income, you might want to look outside the telecommunications industry for your next stock purchase.