Verizon Communications (NYSE:VZ) launched its first 5G market in the spring of 2019. The rollout has continued to progress as the New York-based telecom giant has spent several years and tens of billions of dollars to launch 5G service nationwide.
Now, with Apple expected to release 5G-compatible phones, its network will likely begin to draw more interest and engagement. As 5G utilization sees a dramatic increase, the question now is whether and how much this will help Verizon stock investors.
Verizon and 5G
Verizon was already the first company to begin launching 5G in select cities. Like its main peers AT&T and T-Mobile, it has invested heavily in 5G. In 2019 alone, Verizon spent just under $18 billion, or almost 14% of its revenue, on capital expenditures. The company spent similar amounts in the previous two years. Most of these outlays went to the 5G buildout.
Adding fiber and cell sites has also contributed to a long-term debt that now exceeds $106 billion. This is a significant burden for a company worth just over $64 billion after subtracting liabilities from assets.
Despite this risk, Verizon is only one of three companies offering 5G across the U.S. Additionally, analysts expect the new network will support new artificial intelligence (AI), virtual reality (VR), and Internet of Things (IoT) applications.
Data speeds will also rise exponentially under 5G. The FCC predicts data speeds will increase from the current 12-36 megabytes per second (Mbps) to as high as 300 Mbps. These faster speeds could spawn technologies not yet invented.
Does this help Verizon stock?
The question is whether 5G will bring more investors into Verizon stock.
Verizon trades at a forward price-to-earnings (P/E) ratio of approximately 12. Recently, it also passed a payout hike for the 14th straight year. The yearly dividend of $2.51 per share yields about 4.2%. Moreover, the payout remains safe. During the first half of 2020, Verizon generated about $13.7 billion in free cash flow. This easily covers the dividend expenses for that period of just under $5.1 billion.
Furthermore, the company recently announced it would acquire Tracfone, the leading pre-paid mobile provider, from America Movil. This will cost Verizon $6 billion in cash and stock, but it could also lead to more customer conversions.
So far, the anticipation of 5G and acquisitions have done little to boost Verizon stock. It has remained flat over the last year. Long term, it has risen by about 86% over the last 10 years, significantly underperforming the S&P 500. With profits expected to fall 0.8% this year and increase by 3.4% in 2021, earnings will probably not serve as a catalyst anytime soon.
Is Verizon a buy?
Despite these challenges, income investors should consider a position in Verizon. The 4.2% dividend yield is more than double the S&P 500's average yield of around 1.8%. Also, if the current pace of payout increases keeps up, Verizon will join AT&T as a Dividend Aristocrat in 11 years.
Growth investors should also pay closer attention, as telecom stocks could see much higher growth. Grand View Research predicts a 43.9% compound annual growth rate (CAGR) for global 5G services. It also expects that IT and telecom will make up about one-fourth of this market now valued at around $41.5 billion.
Additionally, with only three 5G providers, Verizon and its two main peers hold oligopoly power over the 5G market. Considering the tens of billions needed to build an additional 5G network, this market dynamic will probably not change.
Finally, if that 5G growth begins to materialize, analysts may have to revise the company's profit growth estimates significantly higher. Such a change could breathe new life into Verizon.
Given the generous income stream and the possibility of massive growth, investors need to keep this telecom giant on their watch lists.