Hot on the heels of breaking concerns about potential liabilities related to its use of lead-sheathed cables, Verizon Communications (VZ 1.17%) on Tuesday published mixed second-quarter results. While the company's non-GAAP (adjusted) earnings came in at $1.21 per share and beat the average analyst estimate of $1.16, sales of $32.6 billion missed Wall Street's target of $33.24 billion.
Despite the significant earnings beat, Verizon stock is roughly flat following its Q2 release and its dividend yield sits at 7.6%. Should income-seeking investors pounce on this ultra-high-yield dividend stock following the recent earnings release, or is there too much risk involved to make it an attractive buy?
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Verizon's Q2 earnings by the numbers
As shown in the chart above, Verizon's net income fell 10.3% year over year to come in at $4.8 billion in the second quarter. Meanwhile, adjusted earnings per share were down 7.6% compared to the prior-year period.
While a big reduction in wireless equipment spending led to a 3.3% decline for overall operating expenses, it corresponded with a 3.5% decline for overall revenue.
Postpaid wireless customers demonstrated far less appetite for phone upgrades, with upgrade activity down 34% compared to the prior-year period. Selling, general, and administrative costs rose roughly 10%. As a result, Q2 operating income declined 4.4% year over year to $7.2 billion.
Postpaid phone additions beat expectations
Verizon's gross consumer postpaid phone additions grew 6.9% year over year in the quarter, but subscriber churn meant the company actually lost 136,000 net postpaid customers year over year.
Thankfully, business wireless phone customers saw 144,000 net additions in the category, pushing overall postpaid wireless phone adds to 8,000 in the quarter. With some help from pricing increases, wireless segment revenue grew 3.8% year over year to hit $19 billion.
Verizon's overall postpaid wireless additions came in significantly better than Wall Street's target; analysts had guided for the company to lose 11,000 net subscribers in the period. On the other hand, performance still came in far below the 326,000 net postpaid phone additions that rival AT&T recorded in Q2.
All in all, Verizon's postpaid wireless numbers were better than expected but still not great.
The broadband business is showing potential
The company's broadband segment has continued to post encouraging results. Total net account additions came in at 418,000, with fixed wireless service posting 384,000 net additions and its Fios fiber internet offering adding 54,000 new accounts.
Progress for the fixed wireless service was particularly strong, and it looks like there's room for continued expansion. Through high-speed 5G offerings for homes and businesses, Verizon has been able to make its broadband services available in areas that are otherwise dominated by regional monopoly providers of wired internet. By the end of 2025, the company expects to have between 4 million and 5 million fixed wireless subscribers -- up from its current base of 2.3 million subscribers.
Update on the lead issue
Verizon, AT&T, and other telecoms have seen their valuations negatively impacted by a report from The Wall Street Journal earlier this month about potential health issues stemming from lead-sheathed copper telecom cables. During its Q2 conference call, Verizon management stated that lead-sheathed cables were used in a very small percentage of its copper network but also noted that incomplete recordkeeping made it difficult to get an exact read on the situation.
The company added that the potential for contamination from lead-sheathed cable was low and that determinations had not been made on whether there were health risks -- or how much it might cost if the company needed to take corrective action. While it remains to be seen how the situation plays out, it looks like the market's reaction to the WSJ report may have been overblown.
Is Verizon stock a buy for its great dividend?
Despite sales falling in its first two quarters, cost-cutting initiatives helped push Verizon's free cash flow (FCF) across the first half of the year up 11% to reach $8 billion. It looks like the company is on track to reach the roughly $17 billion in estimated FCF that analysts extrapolated from guidance the company issued at the beginning of the year.
Having paid out $5.5 billion in dividends across the first half of the year, the telecom should easily be able to cover the $11 billion in payouts it's on track to make for 2023. It should also be able to continue paying down debt.
VZ PE Ratio (Forward) data by YCharts
With the company trading at roughly 7.3 times this year's expected earnings and sporting an attractive dividend yield of 7.6%, Verizon looks cheaply valued and could be a worthwhile portfolio addition for investors seeking high-yield stocks. On the other hand, the company's industry is highly competitive, so it makes sense to take a balanced approach to portfolio construction instead of going all in on one high-yield telecom stock.
