Verizon Communications (VZ -0.96%) posted its fourth-quarter report on Jan. 24. The telecom giant's operating revenue rose 3.5% year over year to $35.3 billion, which beat analysts' expectations by $160 million. Its adjusted earnings per share (EPS) fell 11% to $1.19, but met analysts' estimates.
Verizon's stock held steady after that mixed report, but it's still fallen about 24% over the past 12 months as the S&P 500 dipped 7%. Can this blue-chip dividend stock finally stabilize and beat the market in 2023?
What challenges does Verizon face?
Verizon generated 53% of its fourth-quarter revenue from its wireless business. It remains the largest wireless carrier in the United States with 114.5 million prepaid and postpaid connections. By comparison, AT&T ended the year with 88.8 million prepaid and postpaid phone connections.
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Throughout the first three quarters of 2022, Verizon's sluggish growth in postpaid phone subscribers spooked investors. It unexpectedly lost 36,000 postpaid phone subscribers in the first quarter, added 12,000 subscribers in the second quarter, and only gained 8,000 subscribers in the third quarter.
But in the fourth quarter, it turned a corner with 217,000 postpaid phone net adds. It attributed that acceleration to "aggressive" subsidies for popular handsets like Apple's iPhone 14, which complemented the expansion of its promotional Welcome Unlimited (unlimited calls, text, and data) and One Unlimited (which bundles those benefits with Apple One) plans. Its total wireless revenue increased nearly 6% year over year during the quarter.
Yet, Verizon is still growing at a much slower pace than AT&T, which added nearly 2.9 million postpaid phone subscribers in 2022. The churn rate of Verizon's postpaid phone business (which gauges its loss of subscribers) also rose 8 basis points year over year to 0.89% in the fourth quarter, while AT&T's comparable churn rate dipped by a basis point to 0.84%. Those unfavorable comparisons to AT&T strongly suggest Verizon can't ease off its promotional strategies anytime soon.
The rest of Verizon's revenue comes from its wireline business, which remains sluggish and continues to bleed enterprise customers. It's trying to offset that decline by expanding its consumer-oriented Fios broadband service, which only accounted for 8% of its fourth-quarter revenue, but the segment's revenue still stayed flat year over year for the quarter. In short, Verizon's future still relies heavily on its higher-growth wireless business offsetting its sluggish wireline sales.
What does Verizon expect to happen in 2023?
In 2022, Verizon's total wireless service revenue rose 8.6%. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) dipped 1.1% to $47.9 billion and while its adjusted EPS fell 5.8%.
But in 2023, Verizon expects its total wireless service revenue to rise just 2.5% to 4.5%, for its adjusted EBITDA to stay roughly flat, and for its adjusted EPS to decline 6.4% to 12.2%. That slowdown can be attributed to a challenging mix of macro headwinds, cooling sales of smartphones as the 5G upgrade cycle wanes, and its margin-crushing promotions.
During Verizon's fourth-quarter conference call, CEO Hans Vestberg bluntly warned that the "current promotion incentives are not sustainable for the industry in the long run," and said the company would "pursue more ways to move away from the aggressive handset subsidies" in 2023 to stabilize its profitability.
But Verizon is still struggling a lot more than AT&T, which expects its wireless service revenue to grow "at least" 4% in 2023 as its adjusted EPS declines 4.7% to 8.6%. AT&T faces many of the same macro and competitive headwinds as Verizon, but its stronger growth and milder profit declines arguably make it a better buy.
Where will Verizon's stock be in a year?
At $40 a share, Verizon trades at just 8.5 times the midpoint of its adjusted EPS forecast for 2023. It also pays a forward dividend yield of 6.5%. That low valuation and high yield should limit its downside potential this year as higher interest rates keep most conservative investors glued to blue chip dividend stocks.
However, I don't expect Verizon to outperform the S&P 500 -- which could recover quickly this year if the bear market finally ends -- because it faces more near-term headwinds than catalysts. Verizon still needs to prove that it can consistently expand its postpaid wireless business without crushing its own margins, but many investors simply won't wait around to see if that happens when so many other high-quality stocks are still on sale.
