Please ensure Javascript is enabled for purposes of website accessibility

3 Reasons Verizon Stock Can Fall

By Joe Tenebruso – Nov 25, 2018 at 4:15PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The telecom titan may not be as safe as you think.

Verizon (VZ 3.13%) has long been a favorite stock among income-focused investors. And with its dividend yield currently checking in at a solid 4%, the leading U.S wireless carrier remains a popular income-generating investment.

Yet every business has risks, and it's important to study the threats that could derail your investments. That way, you won't be blindsided by them, and you can identify the key trends you should be watching.

In this regard, here are three risks Verizon investors will want to be aware of. 

A person holding a magnifying glass up to wooden blocks that spell the word risk

Image source: Getty Images.

1. Intensifying competition

The U.S. wireless industry is a fiercely contested arena. And one of Verizon's most troublesome rivals, T-Mobile (TMUS 3.52%), is gaining subscribers at a rapid clip. The No. 3 U.S. wireless carrier added 774,000 postpaid phone subscribers in the third quarter. Such subscribers pay monthly bills and are typically the most sought-after customers for wireless carriers. This marked the 19th consecutive quarter that T-Mobile led the industry in this important metric. Verizon, meanwhile, added only 295,000 net phone subscribers during this period. 

T-Mobile's unconventional moves -- such as eliminating contracts and overages and including a free Netflix subscription with its family plans -- are helping to chip away at Verizon's lead. T-Mobile is also spending heavily to strengthen its network, so much so that its network quality is now considered to be on par with that of Verizon's.

Going forward, it will be more difficult for Verizon to claim that its network is superior. And with this core aspect of its competitive strategy now weakened, it finds itself with a difficult choice: continue to lose customers to T-Mobile, or attempt to match its rival's aggressive promotions. Neither one of those options is ideal, and both could crimp Verizon's profits in the coming years.

2. Costs are set to rise

Verizon's recurring revenue streams and stable cash flows allow it to finance its business with large amounts of debt. Yet this debt has ballooned to staggering proportions in recent years. The company now has nearly $113 billion in debt versus only $2.5 billion in cash. In turn, Verizon paid out more than $1.2 billion in interest in the third quarter alone. 

And now, with rates set to rise as the Federal Reserve moves to normalize its interest rate policy, Verizon's debt service costs could increase dramatically in the coming years. Making these payments will likely not be an issue -- Verizon produced nearly $7.7 billion in operating income in the third quarter, which covered its interest payments several times over. But higher interest costs could weigh on profits and, by extension, make dividend increases more difficult.

Verizon's leadership already appears to be taking this into account. The company recently raised its dividend for the 12th consecutive year. Yet this year's increase is only 2.1%, which is below the current rate of inflation in the U.S. Thus, investors who count on Verizon's dividend to fund their expenses may see their purchasing power decline slightly in the years ahead. Should this continue, income investors could sour on Verizon's stock.

3. Rising interest rates can make Verizon's dividend less attractive  

Dividend stocks have historically been fertile ground for yield-hungry income investors, particularly in low-rate environments. But if the Federal Reserve continues to raise rates, bonds and other fixed-income investments will become more attractive as their yields rise.

In such a scenario, dividend-paying stocks could become relatively less appealing, as they are generally seen to be higher-risk investments than bonds. Thus, if interest rates continue their ascent, investor demand for Verizon's stock could be reduced, causing its price to fall.

Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
VZ
$39.16 (3.13%) $1.19
T-Mobile US, Inc. Stock Quote
T-Mobile US, Inc.
TMUS
$138.90 (3.52%) $4.73

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
326%
 
S&P 500 Returns
102%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.