Verizon Communications (VZ 1.61%) wasn't immune to the adverse effects of the coronavirus pandemic in 2020. Like many businesses, its 2020 revenue declined compared to 2019.
But as a recovery from the pandemic speeds up, Verizon expects to see its wireless service and other revenue grow at least 2% in 2021. So is now a good time to buy its stock?
A look at where Verizon is today and its prospects can perhaps help answer that question.
Positive factors for Verizon
Verizon's expected 2021 revenue growth builds on the wireless-service momentum the telco experienced coming out of 2020. While overall fourth-quarter revenue dropped from 2019, its wireless service revenue grew 2.2% year over year.
Image source: Getty Images.
The wireless service segment represents the largest revenue component of Verizon's business. In the fourth quarter, it contributed $16.7 billion of the company's $34.7 billion in total revenue. Wireless service revenue alone is expected to grow at least 3% in 2021, driven by factors such as increased adoption of higher-priced unlimited plans.
The company sees its wireless service and other revenue, which excludes equipment sales, as the big revenue driver in the years ahead. Adoption of Verizon's 5G wireless network is expected to fuel that growth.
With 5G's faster data speeds, Verizon can offer more than just phone service. The technology adds home and business internet access to the company's lineup. By the end of this year, Verizon anticipates it will provide 5G internet service to 15 million homes across the country.
At a March 10 investor event, Verizon management discussed anticipated wireless service and other revenue growth of 3% in 2022 and 2023 as the company scales up its 5G network. Management then expects 4% growth in 2024 and beyond.
To achieve this, the company spent $52.9 billion to purchase C-band spectrum in a U.S. government auction this year. The purchase more than doubles Verizon's mid-band spectrum holdings, enabling the company to extend its 5G coverage into more locations.
Building out this 5G network is capital intensive, and Verizon is well-positioned financially to meet this challenge. Despite the pandemic's impact on revenue, Verizon experienced 16.8% year-over-year fourth-quarter growth in cash flow from operations. This led to free cash flow (FCF) rising 32.4% year over year to $23.6 billion in 2020.
The company has consistently generated strong FCF over the years.
Data by YCharts.
Its consistent ability to produce FCF means Verizon is capable of funding its 5G buildout and its dividend, which is yielding 4.46% at the time of this writing. Its payout is one of the reasons Warren Buffett's Berkshire Hathaway recently purchased Verizon stock.
Challenges Verizon faces
While the fourth quarter had positive signs, Verizon still faces stiff competition. The U.S. telecommunications market is saturated, and to grow its customer base, Verizon must snatch customers away from competitors. In the fourth quarter, it was far from the best in this arena.
Postpaid phone customers are the telecom industry's most valuable. When it came to growing postpaid phone additions, Verizon lagged far behind its top telecom rivals, AT&T (T 2.29%) and T-Mobile US (TMUS 2.76%).
| Company | Q4 2020 Postpaid Phone Net Adds |
|---|---|
| Verizon | 279,000 |
| AT&T | 800,000 |
| T-Mobile | 824,000 |
Data source: Verizon, AT&T, T-Mobile.
Moreover, for Verizon's customers to use the faster 5G network, they must purchase 5G-enabled devices. This reality hasn't translated to revenue growth for Verizon yet. The company's fourth-quarter wireless equipment revenue dropped from 2019's $6.8 billion to $6.4 billion in 2020.
But as 5G adoption ramps up, Verizon will eventually see equipment sales accelerate. At the end of last year, only about 9% of its consumer postpaid phone base was using a 5G-compatible device, so the company has a substantial growth opportunity ahead here.
The final verdict on Verizon
Verizon's rivals are also investing heavily in 5G networks. As a result, Verizon may not be the biggest winner in the 5G war.
But it possesses many attributes that make it an excellent choice for investing in a 5G stock. Its wireless service revenue is increasing and is expected to grow for years to come.
Management took swift action when the pandemic struck, building up cash reserves to weather the emergency. Verizon successfully expanded its 2020 cash and equivalents to $22.2 billion by the end of the year, up from $2.6 billion in 2019. This illustrates its ability to quickly adjust to even extreme circumstances.
Its efficacy in managing its finances also means its dividend is secure, and the company increased its payout for the 14th consecutive year in 2020.
Even amid stiff competition and a pandemic, Verizon can deliver solid financial results and reward shareholders with a dividend. These factors make its stock a worthwhile investment.
