Verizon (VZ 0.96%), the second largest wireless carrier in the U.S. after AT&T (T 0.10%), is often considered a stable income investment for conservative investors. It's raised its dividend annually for 13 straight years, pays a forward yield of 4.3%, and spent just 57% of its free cash flow on that payout over the past 12 months.
Verizon delivered a total return of 50% over the past five years and still trades at less than 12 times forward earnings. But is it still a good buy in this volatile market?
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Understanding Verizon's history
Verizon's wireless business, which generates most of its revenue, was originally formed as a joint venture with British carrier Vodafone (VOD +0.26%). It became a fully owned subsidiary after Verizon bought out Vodafone's stake for $130 billion in 2014.
Verizon also acquired AOL for $4.4 billion in 2015, and Yahoo's internet assets for $4.5 billion in 2017. It merged those two subsidiaries into a new unit called Oath, which focused on online media and advertising.
Oath flopped, due to intense competition and misfires like the streaming video platform Go90, and Verizon took a $4.6 billion writedown on the unit in late 2018. Last year, it rebranded the downsized unit as Verizon Media and shifted its focus back to its core wireless business.
Managing its debt while growing its free cash flow
Verizon accumulated lots of debt from those massive deals. It sold non-core assets like data centers, cloud businesses, and landline assets to reduce its leverage, but it still ended last quarter with $106.6 billion in long-term debt and $11.2 billion in short-term debt.
However, Verizon's free cash flow still rose 26% annually to $3.6 billion during the quarter, thanks to the stable returns from its wireless business. It doesn't expect to spend any of that cash on buybacks this year, due to the macro pressures from COVID-19, but it will continue reducing its debt, investing in new 5G networks, and paying steady dividends.
The tailwinds and headwinds
Verizon's operating revenues rose less than 1% to $131.9 billion last year as its growth in service revenues offset its declining hardware sales. Verizon still faces intense competition from rivals like AT&T and T-Mobile (TMUS +0.38%), which recently merged with Sprint. Slowing sales of smartphones also pose a long-term challenge to all three carriers.
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However, lower operating expenses boosted Verizon's adjusted earnings by 24% to $4.65 per share -- which easily covered its $2.42 in dividend payments throughout the year.
In January, Verizon expected its operating revenue to rise by the low-to mid-single digits in 2020 with 2% to 4% growth in adjusted earnings.
But during its first-quarter report in April, Verizon pulled its revenue guidance and cut its adjusted EPS forecast to -2% to 2% growth, warning that the headwinds in the first quarter -- including COVID-19, store closures, and sluggish demand for new phones -- wouldn't wane anytime soon.
Wall Street expects Verizon's revenue and earnings to dip 4% and 1%, respectively, this year. By comparison, AT&T's revenue and earnings are expected to drop 6% and 10%, respectively, due to its loss of pay TV subscribers and declines at WarnerMedia throughout the pandemic.
A better bet than AT&T, but don't expect much growth
Verizon is arguably a safer investment than AT&T, which sports a much higher forward yield of 6.8%, since it isn't integrating a massive media business like Time Warner or plowing cash into pricey streaming services to save a dying pay TV business.
Verizon's growth probably won't accelerate until new 5G handsets hit the market, the pandemic passes, and the economy stabilizes. Until then, Verizon's business will likely keep treading water as its high dividend and low valuation keep it afloat.
Therefore, Verizon is still a great stock to buy for stability and income, but investors shouldn't expect it to rally and crush the market anytime soon.
