Most consumers can't live without their smartphones. That fact provides wireless carriers like Verizon Communications (NYSE:VZ) with a predictable source of revenue and profits that can be depended on no matter what is going on with the economy.
In this segment from Industry Focus: Tech, host Dylan Lewis and Fool.com contributor Brian Feroldi share why they think Verizon is a great stock pick for investors who want to de-risk their portfolios.
A full transcript follows the video.
This video was recorded on Jan. 11, 2019.
Dylan Lewis: Why don't we start out with our safest one? That's Verizon Communications.
Brian Feroldi: I'm sure this is a company that almost everybody listening is familiar with. They're the No. 1 wireless provider in the U.S. They also provide wireline to lots of customers. I'm sure lots of people have heard of their internet offering, which is called Fios, which provides video and internet. This is a company with 117 million wireless customers. The cellphone has basically become a utility for consumers today. They pay it the same way they pay their electric bill or their water bill. So, even during a downturn, you can feel really good that Verizon's core wireless business is going to hold up extremely well, because consumers are so willing to pay for their cellphone.
Lewis: Yeah. This is the company that boasts the best wireless network nationwide if you look at most industry data. I think that's particularly big for Verizon because the wireless industry is incredibly cutthroat. It's brutally competitive. But they're able to charge more than a lot of their peers because they offer the best service, because they have the most consistent coverage across the country. That gives them that premium pricing, and I think it gives them a little bit more stability, insulates them from a lot of the competitive pricing that we see from the Sprints and T-Mobiles of the world.
Feroldi: Yeah. Verizon is seen as the gold standard network. They've done a great job with their marketing to convince people that their network is No. 1 and you should stick with them if you want the best service, no matter where you are.
Lewis: To your point about the role that phones play in people's lives, this is something that a lot of people need to have. Depending on where you are in the country, the coverage is super important, especially in some of the more remote areas where you can't bank on being near a major metro area and all of the network benefits that come with that.
One of the strongest signals to me that business is doing well is the fact that their postpaid churn is 0.8%. You compare that to some of the companies that have steadily discounted to try to acquire customers, that's about half of what their churn is. It's clear that the premium pricing, better coverage model seems to work. They hold onto customers rather than having to spend a ton of money to acquire them only to lose them down the road.
Feroldi: Yeah. I'm sure that postpaid churn rate is going to surprise some listeners. I don't know about you, I tried to change my cellphone provider a couple of years ago to one of the discounted offerings. My wife basically said no. I went with it and she convinced me to come back because she wasn't willing to give up using Verizon. Verizon's competitive position is very strong.
Lewis: Looking back at 2007 and 2008, the stock did decline, as did the market, but their decline was lower than the broader sell-off we saw in the market. That's a signal of, this is a company that tends to weather these downturns a little bit better than a lot of high-price growth stocks. For them, curiously, sales actually increased throughout the recession, which you don't see very often.
Feroldi: Right. Back when the recession was just picking up, in 2008, that's when the smartphone boom was starting to take off. Verizon definitely benefited from that. Their revenue actually grew through 2008, through 2009, through 2010. As you mentioned, its stock got walloped, but that was the Great Recession. There were very few places that you could hide in the stock market. So, the stock did decline, but it was actually a lower peak-to-trough drop than the market in general. Verizon is considered to be a low-beta stock, which means that its stock price doesn't move up or down very much when compared to the market in general.
Lewis: Another encouraging sign here, they're one of the companies that continued to hike their dividend during the financial crisis. The dividend is what attracts a lot of people to Verizon. They're a steady payer. They've grown their payment over the last couple of years, and consistently doing it. Granted, they enjoyed the smartphone boom and maybe had a little bit more in the coffers than they would have absent that trend. But that's a sign you want to see, particularly from a dividend payer, when you're looking back at how they performed over downturn periods.
Another sign of them being a solid stock to own if you're worried about a lot of volatility, a lot of risk in the market, is that they trade at a low valuation, 12 times trailing earnings, 12 times forward earnings. That pretty much says it all about the growth outlook for this business.
Feroldi: Yeah, this company is growing its earnings at a mid-single-digit rate. It's about 6% over the last five years. That's about what investors expect moving forward. But the type of investor that's attracted to Verizon is an income investor. They're holding this stock because they want to get their hands on the company's dividend yield. The dividend yield is currently 4.4%. Like you said, it's been paid for literally more than 30 years. The type of person that owns Verizon's stock, is attracted to it, is really there for the dividend. That type of investor is less likely to sell when the market goes down, because they're not in the stock for capital appreciation, they're in it for the dividend. So, as long as the dividend remains solid, I think the stock will hold up very well in any sort of bear market.
Brian Feroldi has no position in any of the stocks mentioned. Dylan Lewis has no position in any of the stocks mentioned. The Motley Fool recommends TMUS and Verizon Communications. The Motley Fool has a disclosure policy.