Verizon (VZ 0.49%) is the second-largest telecommunications provider in the U.S., slightly behind rival AT&T (T +0.42%). The American telecommunications services market has stagnated somewhat after several years of growth due to increased mobile internet usage and price competition among providers putting downward pressure on top lines. Verizon and AT&T experience similar operating catalysts and share growth drivers moving forward, though there are some key differences in recent operating performance, financial health metrics, and valuation.
Verizon's wireless network is well-regarded across numerous rating agencies and operating metrics. RootMetrics crowned Verizon as the fastest and best mobile network in the U.S. for the 12th straight year in 2019, slightly ahead of AT&T. In July, Open Signal rated Verizon the best in the market for 4G reliability and video experience, and Ookla reports that Verizon users enjoy the most consistent network and spend the most time on LTE. The major networks in the U.S. have different performance grades based on the applied metrics and locations, but it is fair to say that Verizon is objectively delivering a strong wireless product.
Verizon looks strong operationally
Verizon has done well to deliver a 22% operating margin and a 12.3% net profit margin, both of which are several percentage points above AT&T's corresponding numbers. This profitability advantage has led to superior return on invested capital (ROIC), with Verizon's 10.9% figure outpacing its rival by 4.8 percentage points.
Image Source: Getty Images
Both companies carry some risks associated with financial leverage, though neither is in a particularly concerning position right now. Verizon's debt-to-equity ratio is 2.22, substantially higher than AT&T's 1.02. Both companies report similar debt-to-EBITDA ratios of approximately 3.1, but Verizon's operating income to interest expense ratio is nearly double its rival's. Taken together, these financial health metrics indicate that Verizon has an overall more debt-heavy capital structure, whereas AT&T is currently spending more of its operating income to service debt.
Its reasonable valuation stacks up nicely to AT&T's
The stock's 12.5 forward price-to-earnings ratio and 14.5 price-to-free-cash-flow ratio are both moderately lower than the telecom industry average, though its EV/EBITDA at 9.1 is higher than the industry average of 7.8. Shareholders enjoy a healthy 3.97% dividend yield, which looks safe in conjunction with a fairly conservative 0.62 payout ratio.
These valuation metrics all indicate that Verizon has room to appreciate if its fundamental outlook becomes sweeter as the impacts of 5G become clear. AT&T is cheaper on each of these metrics and pays a higher dividend. However, investors should expect to pay a premium for Verizon's relative operational performance and financial health profile.
Verizon's financial scale, track record of strong performance, and stated intent to invest in the next-generation wireless network all put the company in a fantastic position to benefit from the proliferation of 5G over the next decade. Higher speed networks might command a premium from subscribers in the earlier days of the rollout, especially if the top networks offer a viable product more quickly than their competitors, so that bodes well for Verizon's top line in the medium term. 5G has the potential to exceed current wired performance from internet service providers across the country, which means that many households might turn to Verizon to deliver home internet in addition to mobile services.
5G is also likely to stimulate the adoption of emerging technologies such as virtual reality, autonomous driving, and new categories within the internet of things (IoT). For Verizon, these all represent new opportunities to deliver connectivity, establish new subscribers, and further monetize existing subscribers.
Verizon is in a good position to overcome medium-term macroeconomic threats of recession, with a subscription-heavy business that is unlikely to be abandoned when household budgets tighten. The stock also pays a nice dividend to help shareholders enjoy returns while waiting for a down market to turn around. Importantly, most mature, high dividend payers from other sectors do not have nearly the same growth opportunity currently facing telecoms leaders on the eve of 5G. Competition and long-term growth are obvious risks, but any tech stock with Verizon's mix of short-term stability and medium-term opportunity is worth a look from value investors.
