Investors did not like what they saw from Verizon Communications (VZ -0.43%) in its earnings report for the second quarter of 2022. Although consumer revenue increased, the telecom company reported decreasing revenue for Verizon Business and wireless postpaid net losses of about 215,000.
This report put further pressure on a stock that has struggled despite being one of only three U.S. providers of 5G service. Nonetheless, the question of how to approach Verizon stock may hinge more on individual investment goals than its 5G-related prospects.
Verizon and earnings
Overall Q2 revenue came in at $33.8 billion, approximately the same as the year-ago quarter. Since operating expenses surged by 2.5% during that period, Q2's net income of $5.3 billion fell 11% compared with the second quarter of 2021.
That helped lead to a free cash flow of $7.2 billion in the first half of the year. This comes in far below levels in the first half of 2021, when Verizon reported a free cash flow of $11.7 billion. Verizon also revised 2022 revenue and EPS (earnings per share) guidance downward, placing further pressure on the stock.
Consequently, the stock's value declined by 7% on the next trading day. This took its P/E (price to earnings) ratio under nine, a level only slightly above that of struggling arch-rival AT&T, which sells for less than eight times earnings.
Verizon's uncertainties stand in contrast to what looks like a bright long-term future. Grand View Research projects a 52% compound annual growth rate (CAGR) for the 5G services market through 2030. AI (artificial intelligence) and IoT (internet of things)-driven applications such as vehicle-to-everything connections and drone connectivity could drive considerable 5G growth for Verizon over time.
Also, Verizon won the most network quality awards from J.D. Power for the last 28 years, arguably making Verizon the best-positioned telco to profit from this trend. Still, the cost of maintaining that rating has left the company with $149 billion in total debt, a heavy burden for a company worth $87 billion after subtracting liabilities from assets.
Still, Verizon could appeal to some investors
Admittedly, that debt leaves Verizon stock with uncertain growth prospects despite the 5G CAGR and low P/E ratio. Nonetheless, its earnings multiple should limit any further downside, creating an excellent opportunity as a lucrative passive income tech stock. Its $2.56 per-share annual dividend now yields 5.8% thanks to the drop in the stock price. This is well above the S&P 500 average yield of 1.6%.
Additionally, this payout cost Verizon $5.4 billion in the first half of the year, meaning the lowered $7.2 billion in free cash flow for the first half of 2022 will likely not affect the dividend.
Moreover, it passed its 15th consecutive annual dividend increase last year. If it maintains that pace this year and for nine additional years, Verizon could become a Dividend Aristocrat. Since ending annual payout increases tends to hurt dividend stocks, further payout hikes are more likely.
Furthermore, as mentioned before, Verizon stock will probably struggle for the foreseeable future. Still, if it can reduce debt and stoke investor appreciation for a burgeoning 5G services market, its stock could move much higher long term.
Consider Verizon stock (if investing for income)
Verizon offers a mixed picture for growth investors. While it provides high-quality service and the tremendous potential of an emerging 5G services business, the cost of maintaining this quality has tremendously strained its balance sheet. That factor may weigh on Verizon stock for the foreseeable future.
However, the drop in the stock price has taken its dividend yield significantly higher. With its market position and history of annual payout hikes, Verizon appears well suited for investors in need of cash flow.