Is Verizon a Good Dividend Stock to Buy?

Telecom giant Verizon (VZ 1.17%) looks like a compelling income investment at first glance. The stock boasts an attractive dividend yield of 7.6% at the time of this writing.

Yet after reporting second-quarter earnings on July 25, Verizon shares moved little, and remain not far from their 52-week low of $31.25, reached July 17.

Does the lackluster stock price suggest reasons to avoid Verizon? After all, as the share price drops, the dividend yield rises, so yield alone isn't enough of an investment indicator.

Certainly, one factor weighing on Verizon's share price is news that lead-sheathed cables, laid before the 1950s, create a potential liability for the company. 

Before deciding to buy Verizon shares for the dividend, it's a good idea to dig into where the company is currently to understand if Verizon truly is a worthwhile income investment.

Verizon's positive dividend indicator

With regards to lead in Verizon's network, at this point, any talk in the media about liability or clean-up costs is conjecture. Verizon is currently performing due diligence, and working with the U.S. Environmental Protection Agency to resolve the issue.

Right now, the company's performance is the more relevant factor in evaluating Verizon as a long-term income investment. One key component here is free cash flow, since this metric indicates Verizon's ability to pay its dividend.

Verizon is doing well in this regard. In the first half of 2023, free cash flow reached $8 billion, up from $7.2 billion in 2022. Its free cash flow growth puts Verizon on solid financial footing to sustain dividend payments while also reducing its substantial debt and investing in its business. This is crucial since telecom companies are capital-intensive operations, particularly now given Verizon is in the midst of its 5G wireless rollout.

Verizon's cash flow is poised to improve further thanks to cost-cutting measures the company is undertaking. Verizon expects to cut expenses by at least $2 billion by 2025.

Signs of Verizon's success

Another positive sign is rising revenue in Verizon's wireless services segment. Q2 wireless service sales increased to $19.1 billion from 2022's $18.4 billion.

This income is important, since it accounted for nearly 60% of Verizon's $32.6 billion in Q2 revenue. The company expects year-over-year wireless service sales to grow at least 2.5% in 2023.

Wireless service revenue benefited from price increases implemented over recent months. But that's not the only factor. Verizon is leveraging its fast 5G network to offer broadband internet, and this should enable wireless service revenue to continue growing.

That's because Verizon's broadband business is booming. Its Q2 net broadband additions totaled 418,000 compared to last year's 268,000, and 384,000 of that comes from customers opting for internet service through Verizon's 5G network.

This allows Verizon to generate multiple income streams from its 5G investment. Another one of those revenue sources is its pursuit of the private network market. For businesses and governments that want their own exclusive wireless network, Verizon provides this through its 5G offering.

The U.S. private network market was worth $3.3 billion in 2022, and is forecasted to grow to $22.8 billion by 2032, providing a multi-year tailwind for Verizon. Its private network customers include the U.S. Department of Veterans Affairs and Cleveland Clinic.

Other considerations before deciding on Verizon stock

Despite the positives, Verizon possess areas of concern. One is the company's massive debt load. At the end of Q2, Verizon's unsecured net debt stood at $126.6 billion. On the bright side, this amount is a reduction from 2022's $130.6 billion. That illustrates Verizon's commitment to reducing its debt, which strengthens the company's ability to maintain its dividend.

But Verizon also struggles to grow its postpaid phone subscribers, the telecom industry's most valuable customer segment. The company exited Q2 with 8,000 postpaid phone net additions, a third less than the 12,000 acquired last year. This contributed to a Q2 revenue drop from 2022's $33.8 billion to $32.6 billion.

A change in Verizon's customer acquisition strategy also contributed to the decline. Verizon turned its customer acquisition focus toward high-value customers, those who will stick with Verizon over the long haul rather than being lured by attractive, albeit temporary, promotions only to flee when the promotional rate expires.

The strategy is paying off. Verizon's Q2 average revenue per account (ARPA) among postpaid customers grew from $145.50 in 2022 to $154.51 this year. Verizon's Q2 postpaid phone churn rate, which measures how many customers are leaving, remained a low 0.83%, consistent with 2022's 0.81% churn rate. This consistency means the company is doing well retaining its existing customer base.

Verizon also holds an impressive track record of dividend increases. Last year marked the 16th consecutive year the company raised its dividend, and Verizon has consistently paid dividends annually since 1984.

This dependable dividend history, combined with Verizon's ability to generate FCF and expand revenue opportunities from its nascent 5G network, make the company an attractive dividend stock. Its share price appreciation may be a grind over time as the company slowly whittles down its debt, but it's a solid income investment.