Verizon Communications (VZ -3.19%) is arguably one of the market's best dividend stocks today. Shares yield 6.8% and this telecom giant shows no signs of letting that payout fall.
But where does Verizon make its money and how much is revenue growing? Let's dig into the trends that drive cash flow for this telecom giant.
Show me the money
Verizon's revenue overall was up 1.8% in the fourth quarter of 2022 to $34.7 billion, but its two most important segments grew differently. Consumer revenue was up 4.2% while business revenue rose 1.2%. These are important trends to watch, but dig closer and you see where the money comes from.
Verizon splits revenue between wireless services, which have a gross margin of 74%, and wireless equipment, which has a negative gross margin of 12.5%. Investors want to see services revenue grow as quickly as possible and that's where Verizon could be seeing the start of some positive trends in both the consumer and business markets.
Reasons to be optimistic about consumer growth
Consumer service revenue grew 5% in the fourth quarter, so there is some positive momentum, but it's where that growth is coming from that's important. Net wireless customers actually fell 0.8% for Verizon over the past year from 115,395 to 114,520, but fixed wireless broadband (5G broadband for the home) jumped from 101,000 to 884,000. Fixed wireless is booming and it's an entirely new revenue source for Verizon.
As customers are signing up for smartphone wireless and fixed wireless, it allows Verizon to also offer streaming bundles, making the product even stickier. The company is doing this with Walt Disney and Apple with offerings continuing to grow. Reselling streaming services is a high-margin business and leverages Verizon's existing customer base and sales infrastructure, so these are great additions to the service side of the business.
Why business revenue will grow
A similar trend is happening for businesses, where the number of connections grew 4.8% to 28.7 million, but fixed wireless connections nearly quadrupled to 568,000. Notice that the penetration of fixed wireless in the business segment is higher than it is for consumers, although it's still very small.
Service revenue growth of 4.7% in the fourth quarter in the business segment is another trend that's heading in the right direction.
In 2023, investors will want to watch the pace of service revenue growth and how quickly fixed wireless is being added to business plans.
Where to watch Verizon's growth
Verizon splits its business into consumer and business segments with consumers accounting for 77% of revenue. But in both segments, it's the service revenue that investors need to monitor.
If Verizon is successful in driving more customers to fixed wireless and streaming bundles, the company can grow the high-margin services business long-term even without adding net customers. I think given the company's P/E ratio of 7.5 and dividend yield of 6.8%, investors are underestimating the company's growth potential.