Verizon (VZ -0.53%) is often considered a stable investment for conservative income investors. It's the largest wireless carrier in the United States, pays a high dividend, and has raised its payout annually for nearly two decades.
Yet Verizon has actually delivered shockingly dismal long-term returns. If you had invested $1,000 in Verizon on Feb. 21, 2014 -- the fateful day it took full control of Verizon Wireless by buying out Vodafone's (NASDAQ: VOD) 45% stake in the joint venture for a staggering $130 billion -- your investment would be worth roughly $740 today. Even if you had reinvested all your dividends, your stake would only be worth about $1,140.
To put that into perspective, a $1,000 investment in an S&P 500 index fund with reinvested dividends would have blossomed to $2,730 today. Let's see why Verizon underperformed the market by such a wide margin -- and whether it will ever recover.
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A decade of anemic growth
Between 2014 and 2022, Verizon's annual revenue only rose from $127.1 billion to $136.8 billion, representing an anemic compound annual growth rate (CAGR) of 0.9%. Its adjusted earnings per share (EPS) increased at a CAGR of 6.4%.
Verizon's top-line growth slowed to a crawl for three main reasons. First, the smartphone market matured and consumers upgraded their devices less frequently. Second, Verizon faced intense competition from T-Mobile (NASDAQ: TMUS) and AT&T (T 1.88%) in the wireless market. T-Mobile, which merged with Sprint in 2020, built a larger 5G network than both Verizon and AT&T by using lower-band spectrums covering wider areas. Lastly, the telecom industry faced persistent macro challenges -- including the pandemic, inflation, and soaring interest rates -- over the past eight years.
Verizon's ill-fated expansion into the digital media market -- through its acquisitions of AOL for $4.4 billion in 2015 and Yahoo for $4.5 billion in 2017 -- exacerbated that pressure. It failed to turn the two struggling companies around or integrate them into its broader ecosystem and eventually sold them both for just $5 billion in 2021.
That media misadventure likely distracted Verizon from countering the competitive headwinds in the wireless market. As T-Mobile expanded, AT&T finally got its act together by divesting its pay TV and media businesses in 2021 and 2022. As a streamlined telecom company, AT&T has grown much faster than Verizon over the past year.
Will Verizon stabilize its business?
With 114.5 million postpaid and prepaid phone connections at the end of 2022, Verizon is still the top wireless carrier in the United States. But its wireless segment only added 201,000 postpaid phone subscribers in 2022 versus AT&T's addition of 2.9 million comparable subscribers. It also lost another 127,000 postpaid phone subscribers in the first quarter of 2023.
To stem that bleeding and maintain its lead in the wireless market, Verizon has been rolling out aggressive promotions, new unlimited plans, and big subsidies for popular devices. But it also expects those margin-crushing moves across its consumer division -- as well as the sluggish growth of its business division in the tough macro environment -- to reduce its adjusted EPS by 6%-12% for the full year. Analysts expect its adjusted EPS to drop nearly 10% this year and stay roughly flat in 2024.
As Verizon's growth stalls out, the ugliness of its balance sheet becomes more glaring. It ended its latest quarter with $132 billion in unsecured debt -- most of which came from its aforementioned buyout of Vodafone's stake in Verizon Wireless -- and a net unsecured debt to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio of 2.7. That high leverage could make Verizon a deeply unappealing investment as long as interest rates keep climbing.
Verizon's low forward multiple of eight and its high forward dividend yield of 7.5% could limit its downside potential as the bear market drags on. But it probably won't rally until its growth in postpaid wireless subscribers stabilizes, its profits climb, and it meaningfully reduces its debt levels. So, for now, I expect Verizon to continue to underperform the market for the foreseeable future as it desperately tries to counter all the macro and competitive headwinds.
