U.S. telecom giant Verizon Communications (VZ 0.15%) has struggled, ceding customers to competitors like AT&T and T-Mobile over the past several quarters.
Dividend investors got some good news when the company released its Q1 earnings for 2023, though some common problems within the company keep rearing their heads. On the one hand, Verizon offers a generous dividend yielding 6.7% at today's share price. But on the other, the stock has underperformed the broader market for years.
At a discounted valuation, is Verizon a rebound candidate worth considering? Or is this stock destined for mediocrity moving forward? Here is what you need to know.
A high-yielder you can feel confident in
The investment narrative for Verizon is easy. Verizon's share price is down more than 25% over the past decade, so you own shares for the big dividend that yields 6.7% at today's share price. The 10-year U.S. treasury bond yields about 3.4% today, so most would call Verizon's stock a high dividend yielder.
Whether a company can afford to pay a dividend that big is usually an investor's first concern for any high-yield stock. But Verizon seems to be doing well in that area. Verizon has to invest a lot of money into its business, which can skew cash flow. The company brought in $5 billion in net income in Q1, covering its $2.7 billion in quarterly dividend expenses.
If you go back a whole year, Verizon's dividend payout ratio is about half of its earnings. In other words, investors can feel pretty good about their ability to continue paying shareholders. It frequently uses the balance sheet to plug any gaps in cash flow (dividends are still a cash expense). Verizon's leverage is a tad high at 2.7 times debt to EBITDA, but it improved from 2.8 times a year ago.
Verizon's core business keeps struggling
Verizon's utility-like business makes it a reliable dividend stock, but looking at the core business, you'll see why growth is virtually non-existent. The company has slowly bled customers for over a year now. Ironically, the company's graphic below celebrates 2.4 million in gross wireless additions, but it still lost 263,000 net accounts in the quarter, its worst since Q1 a year ago.
Image source: Verizon Communications.
Selling, general, and administrative expenses were up almost 5% from a year ago, signaling that Verizon could have stepped up its spending to bring customers in. But since it seemingly can't keep customers onboard, the same problems persist. A similar trend is starting in business wireless, where net additions are steadily trending in the wrong direction.
Dividend investors shouldn't panic, because Verizon is still on solid financial footing. But it's hard to imagine much growth moving forward until these trends change.
Could the stock's low price make up for mediocre results?
Most consumers in America have smartphones at this point, so growth expectations were already modest for wireless companies. Analysts were expecting low-single-digit earnings growth from Verizon. But given the company's struggles, analysts have throttled down expectations to virtually zero growth for the time being.
Verizon looks cheap at face value, trading at a price-to-earnings ratio (P/E) of just 8, less than half the S&P 500's current multiple. But sometimes stocks are cheap for a reason, and Verizon is a company without much growth on the horizon. Most investment returns will probably come from the company's dividend for now.
VZ PE Ratio (Forward) data by YCharts
Of course, that could change. But operating metrics will probably change first, and there aren't signs of life yet worth celebrating. Retirees can confidently make Verizon part of a diversified income-focused portfolio. Otherwise, there just isn't enough to get excited about.
