Verizon (VZ 1.17%) is a classic high-yield, blue-chip stock, and it's long been popular among dividend investors.
However, it's also been an undeniable value trap over the last several years as the chart below shows.
A combination of slowing growth in the wireless industry, increasing competition, weakening consumer demand due to macroeconomic pressures, and a decline in the legacy wireline business have all led to challenges at Verizon and its top rival AT&T (NYSE: T).
Over the last five years, the company's revenue and profits have essentially been flat, which has helped pressure the stock lower.
However, after the sell-off, Verizon now trades at a forward price-to-earnings (P/E) ratio of 7.4 and offers a dividend yield of 7.7%. That yield has made the stock particularly attractive for dividend investors, and there are some signs that the business could be stabilizing after years of stock declines.
Image source: Getty Images.
Is the worst over?
Verizon's overall revenue is falling due to a decline in its legacy wireline business and in equipment, but its core wireless service revenue continues to grow, up 3.8% in the second quarter, and the company is forecasting wireless service revenue growth of 2.5% to 4.5% for 2023.
While net income and earnings per share (EPS) are still declining, Verizon posted an increase in free cash flow, the most important profitability metric for dividend investors. Free cash flow rose from $7.2 billion in the first half of 2022 to $8 billion in the first half of 2022, and management gave a strong sign that free cash flow would continue to move higher.
CFO Anthony Skiadas said on the call that peak capital spending on its 5G rollout is now behind it and that capital expenditures in 2024 should resemble its current run rate, representing a modest decline from 2023 and supporting growth in free cash flow. Verizon is also on track to reach its goal of $2 billion to $3 billion in annual savings by 2025.
Additionally, Verizon is taking steps to reduce its large debt burden as net debt fell $3.2 billion to $126.6 billion in the quarter.
New challenges emerging
While the underlying business seems to be stabilizing, two news items have come up in recent weeks reminding customers that unexpected challenges could also trip up the stock.
First, a Wall Street Journal investigation showed that AT&T and Verizon are responsible for thousands of miles of lead-sheathed cables that have been left behind and are polluting the nation's water supply.
Verizon addressed the investigation on the call, tamping down some of those concerns about the cable, and also said that it's far too early to assess the financial impact of the cleanup, though some estimates have been in the billions of dollars.
Separately, Amazon launched a new partnership with DISH Network to offer subscribers wireless service for $25/month forever. While investors seemed to brush off the threat after selling off telecom stocks when rumors of the partnership broke in June, the move could weigh on industry pricing if it attracts enough new customers.
Is Verizon stock a buy?
In addition to Verizon's stock high yield, there are two other metrics that favor buying Verizon for its dividend. Based on EPS guidance for the year, the stock has a dividend payout ratio of just 55%, meaning the company can easily fund the dividend and have billions left over to pay down debt and repurchase stock.
Additionally, Verizon should benefit from the economic recovery and, according to the Federal Reserve, the eventual decline in interest rates, which will make its dividend yield more attractive as bond rates fall.
Verizon stock may not have hit bottom yet, but it should be near a bottom as long as the company can deliver improving cash flow as it forecasts.
For dividend investors, it's worth taking a nibble for the high yield and the potential for a turnaround.
