What expenses would you eliminate before you stopped paying your cellphone bill? There's probably a streaming service or two, maybe a night out each month, and even a gym membership that would be cut before I went without a smartphone connection for a month.
This level of stickiness for consumers is the reason Verizon Communications (VZ 0.03%) is a dividend stock that I think is a no-brainer right now. It's not without risks, but the operating trends are heading in the right direction.
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What we learned from Verizon's earnings
The past year has been a turbulent one for Verizon. It reported flat wireless subscriber numbers for the first three quarters of 2022, only to report 217,000 wireless postpaid additions in the fourth quarter.
This showed that market share losses weren't getting worse, and the company's 3.5% growth in the quarter to $35.3 billion in operating revenue was solid.
One of the big challenges for Verizon has always been the amount of money it costs to build its wireless network. Investment peaked in 2022 at $23.1 billion, which contributed to reduced free cash flow from $19.3 billion to $14.1 billion, but the investment will slow in coming years. In 2023 the capital expenditures budget is $18.25 billion to $19.25 billion, which will fall to $17 billion in 2024.
If Verizon can turn up growth, this could be a great investment.
Verizon is turning on the growth engine
Fixed wireless, which is Verizon's name for 5G broadband services to homes and businesses, is really the company's path to growth. In the fourth quarter of 2022, the company added 379,000 fixed wireless customers and now has 1.4 million people on the service.
I think this could be a continued growth driver for years as people look for alternatives to cable broadband.
Having smartphones and broadband in homes also allows Verizon to bundle more effectively. The company has started streaming bundles with Disney and Apple but look for these wireless and streaming bundles to grow over time.
A dividend to count on
Verizon's current dividend of $2.61 per share annually is a 6.3% yield at today's share price. The company paid out $10.8 billion in dividends last year from $14.1 billion in free cash flow. That doesn't leave much cushion to pay down the $150.6 billion in debt on the balance sheet, but remember that Verizon is reducing capital expenditures and expects to grow high-margin service revenue between 2.5% and 4.5% in 2023.
The wireless business is difficult given the capital costs involved, but it's also a very sticky business because users value the service. I think the growth from fixed broadband and the introduction of bundles more than make up for the risk associated with a large debt load.
Long-term investors want moats in their stocks, and what better moat than a lock on high-quality spectrum, $100-plus billion in capital assets in the ground, and a market where there are only three wireless suppliers? Verizon is a no-brainer at this yield, and I'm comfortable holding it for the foreseeable future.
