If I could only buy one stock, I would need to have some pretty strict requirements in place to ensure it is a successful pick. Given the economic backdrop and rising interest rates, I would want a company that's solidly profitable, has a wide moat in its industry, and it trades at a very reasonable earnings multiple. A solid dividend would be nice, too.
While the stock that jumps to mind for me may not be a popular pick at the moment, Verizon Communications (VZ -0.53%) does meet the criteria. The company went through some ups and downs in the wireless business over the past couple of years, but its price-to-earnings ratio of 8.3, dividend yield of 6.3%, and strong position in a U.S. wireless market that has just three major players make this a stock with a great balance of value and potential upside. Let me explain.
Image source: Getty Images.
The growth case for Verizon
The wireless industry is a competitive business, with Verizon, AT&T, and T-Mobile all having strong competitive positions at one time or another. With just three major wireless providers, it's a matter of what each company does with their leadership position that matters. T-Mobile is clearly the value provider. AT&T is gaining share as it unwinds previous corporate complexity, while Verizon is taking a unique approach that's only now starting to play out.
One growth product that I'm excited about (and using right now) is what Verizon calls fixed broadband. This is simply a broadband connection that's 5G instead of a wire coming into your home or business. In the first two quarters of 2022, Verizon added 450,000 fixed broadband connections, and growth is accelerating.
If Verizon can reach into more homes with wireless internet, it gives the company an option to create a bundle that could be both a growth driver and a product that makes Verizon extremely sticky for consumers. That's exactly what's happening.
A new bundle
Cable TV was always the core product of a cable bundle with broadband and phone added on top. I think a Verizon bundle will start with the smartphone and add broadband and streaming or other services to the mix. Here are the bundle parameters I see right now:
- Wireless smartphone service
- Home fixed broadband (5G home internet) service
- Streaming and services from partners
We are already starting to see this play out in different ways. "One unlimited" bundles Apple One with Verizon's wireless service. Verizon also offers "The Disney Bundle" for $13.99 per month, which includes Disney+, Hulu, and ESPN+. These aren't technically bundled with home broadband, but the Verizon Home 5G service starts at $25 per month for 5G customers. Bundles are starting, and in time I think they'll expand.
As streaming companies start to have a harder time with customers churning each month -- see Netflix's recent results -- they will likely see being part of a bundle from a core service like wireless or broadband as an attractive option (as cable networks have for decades). I think Verizon has the ability to create an attractive next-generation bundle, and it's already showing the willingness to move in that direction.
What about the debt?
Verizon has an incredibly high debt load of $149.1 billion, primarily because it's incredibly expensive to buy spectrum and build out a wireless network. But this debt isn't as scary as it seems.
Management reported in the second quarter of 2022 that net unsecured debt to adjusted EBITDA (which is a proxy for cash flow) was just 2.7 times. That's a reasonable multiple and down from 2.9 times a year ago.
You can see below that free cash flow is hovering around $10 billion after the $45 billion investment in spectrum early in 2021. I would like to see some of the cash generated used to pay down debt and not just pay dividends, but for now, debt isn't a huge concern given strong cash flows.
VZ Free Cash Flow data by YCharts
Why Verizon is the ONE stock to buy
I started this discussion with the acknowledgment that buying just one stock would come with trade-offs. To get value and dividends, you aren't likely to buy a growth stock. But with fixed wireless and bundling, Verizon has growth options, and it has a great core business churning out cash each quarter.
There are certainly questions about how it will handle increasing competition from AT&T and T-Mobile, but that's why shares trade for just over eight times earnings. That's a great value in an industry that I think will be extremely valuable for decades to come, which is why Verizon would be the one stock I would buy today.
