Verizon Communications (VZ -0.53%) posted a mixed first-quarter earnings report on April 25. The telecom giant's operating revenue declined 2% year over year to $32.9 billion and missed analysts' estimates by $740 million. Its adjusted earnings fell 11% to $1.20 per share but still cleared the consensus forecast by $0.01.
Verizon's stock held steady after that report, but its shares remain more than 30% below their all-time high from late 2020. Should investors still consider Verizon to be a safe bear market buy, or are there better telecom stocks to buy right now?
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It's still losing postpaid phone subscribers
Verizon had 114.5 million postpaid and prepaid phone connections at the end of 2022, making it the largest wireless carrier in the United States. But last year, Verizon's wireless segment added a mere 201,000 postpaid phone subscribers while its closest competitor AT&T (T 1.88%) gained nearly 2.9 million comparable subscribers.
Verizon had a net loss of 127,000 postpaid phone subscribers in the first quarter of 2023 -- which consisted of a loss of 263,000 consumer subscribers and a gain of 136,000 business subscribers -- compared to AT&T's addition of 424,000 comparable subscribers in the same period. Verizon's postpaid phone churn rate of 0.9% also came in higher than AT&T's ratio of 0.81%.
Nevertheless, Verizon's wireless revenue still rose 3% year over year to $18.9 billion as its higher business and device revenues offset the softness of its consumer division, which continues to face tough macro and competitive headwinds.
On the bright side, the telecom's broadband business gained 437,000 net adds in Q1, marking its strongest quarterly growth in over a decade. That expansion was mainly driven by robust demand for its fixed wireless and Fios internet services.
Its margins keep crumbling
To stabilize its core wireless business, Verizon rolled out aggressive promotions, new unlimited plans, and generous subsidies for popular devices. But those costly strategies reduced the operating margin of its consumer segment by 30 basis points year over year to 28.6% in the first quarter. The business segment's operating margin fell 130 basis points to 7.4%, which suggests its recent growth was still heavily driven by promotions.
Verizon's outlook suggests that pressure will persist. For the full year, it expects its total wireless revenue to rise 2.5%-4.5% -- which suggests the segment's growth won't meaningfully accelerate -- as its adjusted EPS declines 6%-12%. Analysts project its revenue will stay flat and its adjusted EPS will drop 9%.
But it's cheap and pays a reliable dividend
Verizon and AT&T are both shouldering a lot of debt from their past acquisitions. Verizon had a net unsecured debt-to-adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio of about 2.7 at the end of the first quarter, but that's significantly lower than AT&T's comparable figure of 3.2.
Verizon's free cash flow (FCF) also more than doubled year over year to $2.3 billion, which suggests it can easily cover its high forward dividend yield of 7%. During the conference call, CEO Hans Vestberg said that as the company builds on "the free cash flow growth generated in the first quarter," it expects to see a "significant improvement" in its payout ratio that will put it in a "strong position to increase the dividend once again and bring us closer to our debt targets over the following years."
Verizon's stock still looks dirt cheap at 8 times forward earnings. Its low valuation, FCF growth, and high yield could limit its downside potential -- even if its upside potential is also limited. Yet AT&T, which faces many of the same challenges but is still growing faster than Verizon, looks even cheaper at 7 times forward earnings and pays a forward yield of 6.3%.
Just buy AT&T instead of Verizon
Verizon will likely remain out of favor this year as investors fret over its sluggish growth in postpaid phone subscribers and margin-crushing promotions. So if you're looking for a cheap telecom stock with an attractive dividend right now, it arguably makes more sense to buy AT&T -- which looks a lot more appealing now following its divestments of DirecTV and WarnerMedia -- instead of waiting for Verizon to finally stabilize its wireless business.
