Verizon (VZ -0.17%) is about to connect with both customers and investors in a profound way. As more customers upgrade to 5G-compatible devices, it should start to upload returns from its investment in 5G.
Moreover, Verizon, T-Mobile (TMUS 0.48%), and AT&T (T 1.27%) have formed an oligopoly in the U.S. for this essential service. As more individuals, businesses, and gadgets switch to using 5G networks, Verizon stockholders should continue to download steady, significant returns for investors.
Verizon is stronger by NOT diversifying
Verizon has gone all-in on 5G. Such bets are typically considered risky. As most investment advisors will tell you, it's better to diversify. However, this may be the one time where going against conventional wisdom makes more sense. Given the essential nature of wireless communications these days and the reduced level of competition in the 5G arena, this is a strategy not likely to fail Verizon.
Moreover, efforts to diversify have not really helped the main players in this industry. Early on, Verizon bought AOL and Yahoo! in an attempt to form a media business. This investment has been underwhelming and hurt the stock in the past. Nonetheless, while it has kept Verizon Media active, it has turned its attention almost exclusively to 5G.
Then there is AT&T, which made a bet on pay-TV and streaming. AT&T's $67.1 billion investment in DirecTV has led only to cord-cutting. Now, according to the Financial Times, AT&T has received bids for the DirecTV business that would value it at around $15 billion.
By not making any more big bets on media, Verizon is placing itself in a stronger financial position. Indeed, like its 5G peers, it has had to invest tens of billions in a 5G network.
Over the last nine months alone, Verizon spent almost $14.2 billion on capital expenditures. This is more than the $12.3 billion spent in the first nine months of 2019.
Still, Verizon can afford such investments. The company generated more than $18.3 billion in free cash flow over the first nine months of 2020. This does not include the money spent on capital expenditures. This also left enough cash to spend $7.6 billion on dividend payouts during the same period.
The strong free cash flow is likely one reason why Verizon shareholders received a dividend payout hike after the most recent quarter. At just over $2.51 per share, Verizon's dividend now yields a return of about 4.2%. This represents the 14th consecutive annual increase.
Verizon is the "compromise" 5G stock
This dividend can also help Verizon establish a strong connection with investors. Its forward price-to-earnings (P/E) ratio stands at 12. Moreover, given the flat earnings growth from the latest earnings report, Verizon may not seem to justify a higher multiple.
Still, Verizon looks like a compromise choice between its two direct peers. Verizon stock has delivered a return of about 66% over the last five years. This is well below T-Mobile's growth of just over 250% over the same period.
However, Verizon outperformed AT&T's 20% return over the five years. A dividend, which now yields about 6.8%, is the only reason that AT&T's shareholders earned a positive return at all.
Verizon may hold another advantage as well. T-Mobile's growth occurred during the time of a rising stock market. With no dividend, investors could abandon T-Mobile in droves if the market turns negative.
In contrast, Verizon's rising dividend gives shareholders a huge incentive not to sell in a market downturn.
Verizon stock is a buy
Given the company financials and the future of its business, Verizon is a buy, especially for growth and income investors.
Although Verizon underperformed T-Mobile, investors should not assume they have received a weak signal from Verizon stock. Verizon still experienced slow, steady increases. The stabilizing influence of the dividend also gives investors a strong connection to the telecom stock.
Additionally, the massive, focused investment in 5G places it in an essential business with few competitors. As long as the company keeps its network stable and reliable, it should attract and retain business regardless of the economy.
Investors wanting stability, cash returns, and stock price growth will probably connect with all three of those attributes in Verizon stock.