Verizon Communications (VZ 1.03%) posted its second-quarter earnings report on July 25. The telecom giant's revenue fell 3.5% year over year to $32.6 billion, which missed analysts' estimates by $720 million and marked its second consecutive quarter of declining revenue. Its adjusted EPS fell 8% to $1.21 but still cleared the consensus forecast by four cents.
Verizon's stock barely budged after the report, but it remains 36% below its all-time high from December 2020. Does that massive pullback, which boosted its forward dividend yield to 7.6%, make it a worthwhile investment for patient income investors?
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Why did Verizon's stock crash?
Verizon's precipitous decline can be attributed to three major challenges. First, the growth of its wireless segment slowed to a crawl as T-Mobile (TMUS 0.18%) rolled out a 5G network with broader coverage regions, and AT&T (T 1.61%) doubled down on expanding its 5G and fiber businesses after divesting its pay TV and media businesses.
Verizon's wireless business only added 201,000 postpaid phone subscribers in 2022, while AT&T added nearly 2.9 million comparable subscribers. Verizon then lost 127,000 postpaid phone subscribers in the first quarter of 2023 (as its loss of 263,000 consumer subscribers offset its gain of 136,000 business subscribers), while AT&T added 424,000 comparable subscribers. It mainly blamed that slowdown on the competitive headwinds.
Second, Verizon's consumer segment launched more promotions, device subsidies, and unlimited plans to stay ahead of AT&T and T-Mobile. It also ramped up its spending on the expansion of its 5G networks. That higher spending reduced the consumer segment's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin from 43.7% in 2021 to 40.2% in 2022. Lastly, rising interest rates cast a harsh light on Verizon's long-term debt, which only declined 2% to $141 billion at the end of 2022. Those rising rates also made its dividends less appealing than fixed-income investments.
Did Verizon solve those three biggest issues?
Verizon made progress toward rectifying all three issues in the second quarter. Its wireless business added 8,000 postpaid phone subscribers, as its 144,000 additions in its business segment offset the consumer segment's loss of 136,000 subscribers. That growth seems anemic, but the expansion of Verizon Business -- which added more than 125,000 postpaid phone subscribers for eight consecutive quarters -- could buy it more time to turn around its ailing consumer business.
The adjusted EBITDA margin of Verizon's consumer business also expanded 260 basis points year over year to 43.1% in the second quarter. For the first half of 2023, the segment's adjusted EBITDA margin rose from 41% to 42.3%. That expansion, which was driven by a slower pace of consumer upgrades (via lower-margin promotions and device subsidies) and higher service revenue, suggests its profits won't fall off a cliff as it clashes with T-Mobile and AT&T.
Verizon's broadband business also continued to grow, with 418,000 net additions in the second quarter. That represented the segment's third consecutive quarter of more than 400,000 broadband net additions -- and that expansion could also offset some of the tougher challenges it faces in the wireless market.
Verizon ended the second quarter with $138 billion in long-term debt, which represented a 2% decline from a year earlier and reduced its net unsecured-to-consolidated-adjusted-EBITDA ratio by 10 basis points to 2.6. That leverage is still high, but its gradual decline -- and a possible stabilization in interest rates -- could make it less glaring.
Last but not least, Verizon insists it can still grow its free cash flow by at least 21% to over $17 billion this year -- which should easily cover the dividends that consumed $10.8 billion of its cash last year.
Is Verizon worth buying again?
For the full year, Verizon reiterated its guidance for a 2.5% to 4.5% increase in wireless service revenue, a 2% decline to 1% growth in its adjusted EBITDA, and a 6% to 12% decline in its adjusted EPS. Analysts expect its total revenue and adjusted EPS to decline 11% and 19%, respectively, for the full year -- so its growth could continue to cool off even as it expands its healthier business wireless and broadband divisions.
Verizon is taking some meaningful steps toward resolving its biggest problems, but it could take a long time to turn around the entire ship. It pays a massive dividend, and its stock looks dirt-cheap at 7 times forward earnings, but a few more green shoots need to appear before it can be considered a compelling investment. So, for now, I'd prefer to stick with other blue chip dividend stocks than take a chance on Verizon's eventual recovery.
