Nothing in investing is guaranteed, but that doesn't mean you won't see the occasional fat pitch. Telecom giant Verizon Communications (VZ 0.88%) looks like a solid bet to potentially reward investors with market-beating returns over the coming years.
Verizon's investment potential depends on three parts that contribute to making the stock worthwhile for investors.
1. Verizon stock pays a dividend that yield 5%
Verizon and its chief competitors, AT&T and T-Mobile US, control the U.S. telecom market. They spend billions of dollars each year to build, upgrade, and maintain the wireless networks their customers rely on. These vast investments discourage competitors from entering the industry because nobody wants to spend that much money for a chance at competing.
Image source: Verizon.
It gives them pricing power to enjoy robust cash flows from their business. Additionally, people rely on their smartphones and pay their bills regularly.
VZ Cash from Operations (TTM) data by YCharts
Verizon's been an outstanding dividend stock; it's raised the dividend for 18 consecutive years. The dividend payout ratio is just 49% of the company's profits, so shareholders can feel pretty good about getting that dividend check each quarter. The dividend yield is a juicy 5%.
2. Verizon is seeing modest profit growth
Verizon is not a rapidly growing business; its revenue growth has averaged about 2% per year over the last decade. The company operates in the United States, where almost everyone has a smartphone these days, and most user growth comes from stealing customers back and forth from its competitors.
However, Verizon does have emerging opportunities beyond wireless. Its connections with commercial and industrial users grew by double digits in 2022 Q1, driven by the Internet of Things (IoT), made possible by 5G network technology.
Traditionally non-connected devices like vehicles are becoming increasingly digital, with in-vehicle internet and autonomous driving potentially leading to increased demand for connectivity over the years ahead.
Verizon probably won't turn from a tortoise into a hare, but the ingredients seem there for steady bottom-line growth. Analysts expect earnings per share to grow 3% to 4% annually over three to five years.
3. Verizon is an undervalued stock
It's somewhat ironic that Verizon's valuation has changed so much in recent years, despite seeing little change in the actual business.
The share price has only risen 10% over the past five years, but the price-to-earnings ratio (P/E) has fallen 35%, indicating that profits are growing faster than the stock.
VZ PE Ratio data by YCharts
The stock's current P/E ratio is 10, roughly 28% below its 10-year median P/E of 14. Stocks are unpredictable day by day, but fundamentals and valuation tend to make sense over the long term.
It may not happen right away, and it may not happen all at once. Still, investors could reasonably expect a few points of share price gains each year if the business continues performing well and the stock slowly begins reverting to a higher valuation.
Putting it all together
Investors get an easy 5% return from Verizon's great quarterly dividend. The stock should move higher over time if profits continue growing; that means 3% to 4% from profit growth and another 2% to 3% if the market shows more appreciation via a higher valuation on shares.
Verizon could reasonably generate total returns of 11% to 12% per year. You can't know for sure, and even the fat pitch is a swing and a miss every now and then. But if you're looking for a defensive stock with some intriguing upside, Verizon could be just what you're looking for.
