Verizon (VZ -0.41%) is a stock of contradictions. As one of only three nationwide providers of 5G service in the U.S., it holds considerable power in the wireless space. Still, high debts and capital costs led to a secular decline in its stock.
Nonetheless, Verizon has won the most network quality awards from J.D. Power -- 30 consecutive times. That edge on quality is a competitive advantage that could help its stock turn around, but only if it makes the one move that would drastically improve its financial situation.
What Verizon should do
Verizon could become more investable by making one simple but painful move -- eliminating its dividend.
Admittedly, that action might seem counterintuitive. The payout on Verizon stock has risen yearly since 2007, which likely means numerous investors own the stock exclusively for the payout. And since Verizon has announced payout hikes in early September in past years, we should know soon whether that streak will continue.
Still, the current payout of $2.61 per share means Verizon must spend about $11 billion per year to fund the dividend. With the stock down by about 40% over the last five years, the dividend yield has risen to 7.8%. In comparison, the S&P 500 yield is just under 1.6%, making Verizon's cash return nearly five times higher.
Nonetheless, if investors factor in the falling stock price, Verizon's return over the last 12 months is a negative 18%. This means the drop in the stock price has more than negated the massive dividend. Even at its current price-to-earnings (P/E) ratio of 7, investors may be reluctant to buy the stock under those conditions.
Verizon's financials and the dividend
Additionally, investors should consider the changing nature of the telecom industry.
Verizon paid a dividend since it became Bell Atlantic following the breakup of the original AT&T in 1984. However, at that time, the company was primarily a landline business. Since capital expenditures funded little more than maintenance and network builds in newly developed areas, the company had plenty of cash to fund dividends.
In contrast, today's Verizon is predominantly a wireless and fiber company. Over time, Verizon had to fully rebuild its wireless network every few years to compete with AT&T and T-Mobile, most recently with the 5G upgrade.
Such action has led to $23 billion in capex in 2022 and $20 billion the previous year. With $10 billion spent in the first six months of 2023, investors should not expect that expense to fall anytime soon as it plans a 6G upgrade.
Moreover, in early 2021, Verizon spent $53 billion on C-band spectrum. This amounts to "RF real estate" that allows it exclusive use of a given frequency in a specific area. Those frequencies are critical to maintaining the quality of its network as it upgrades.
Still, such costs have taken its total debt to almost $153 billion, a tremendous burden considering its stockholders' equity of just under $97 billion.
The dividend policies of Verizon's competitors
Furthermore, investors should consider the history of its competitors with dividends. Like Verizon, AT&T was a one-time landline company that once offered rising dividends to shareholders.
But, with its increasing costs in capex and costly failures with non-telecom businesses, AT&T slashed its dividend in 2022 after 35 consecutive years of increases. And despite the reduction, AT&T's payout also yields 7.8%, but the decline in AT&T stock continued.
In contrast, T-Mobile emerged much later and has always existed as a wireless company. Consequently, it never offered a dividend. The lack of a dividend expense enabled it to cut costs, gaining market share for the carrier. With that growth, it is the only company to deliver investors a positive return, with stockholders more than doubling their investment over the last five years.
VZ Total Return Level data by YCharts
Verizon, without a dividend
Indeed, if Verizon eliminated the dividend, it would upset income investors, likely leading to a short-term sell-off in the stock.
Nonetheless, amid high debts and substantial capex costs, the stock price continues to drop. That means the dividend could be the cause of Verizon's negative return.
Additionally, with AT&T's reduced but still generous dividend, its decline has continued. That likely means telecoms will have to follow T-Mobile's example of no dividend payments to achieve positive returns.
Ultimately, investors need to watch Verizon next month for dividend news. Another payout hike or no action at all may not change the state of Verizon stock. However, if the company terminates the dividend, Verizon stock probably has the catalyst it needs to turn to growth, especially at its current rock-bottom P/E ratio.
