Many readers are likely familiar with Verizon (VZ +0.15%). The communications infrastructure giant is one of the leading phone and internet service providers in the U.S., with nearly 144 million wireless retail connections and total third-quarter revenue of $33.3 billion.
The issue, though, is that a business like Verizon, that's critical to its customers' lives, has made for a terrible investment. In fact, shares are down 38% in the last five years.
But is this top telecom stock a good investment to make right now as we look toward the future? Let's examine the reasons for and against buying shares in Verizon.
Reasons to invest
Verizon might be an attractive stock for income-seeking investors, who are likely those near or in retirement. As of this writing, Verizon's dividend yield is a healthy 7.1%. Even more encouraging is the fact that the quarterly payout has increased for 17 straight years.
Investors don't have to worry about the company's dividend streak being disrupted anytime soon. Verizon is a consistently profitable enterprise. In the latest quarter, the business reported adjusted earnings per share of $1.22, which is almost double the quarterly dividend payout of $0.67.
And through the first nine months of 2023, Verizon generated $14.6 billion of free cash flow. That was more than enough to cover the $8.2 billion in dividends paid. Clearly, the company has the room to continue increasing its payout in the years ahead.
The current valuation is also compelling. Because the stock has significantly underperformed the market in recent years, it's dirt cheap. Shares trade at a trailing price-to-earnings (P/E) ratio of 7.6. This is down from a multiple of nearly 14 just three years ago. For comparison, the S&P 500 carries a P/E ratio of 20.4.
NYSE: VZ
Key Data Points
Reasons to avoid
As is the case with its peers, Verizon is saddled with a massive debt burden. As of Sept. 30, the business carried a whopping $147 billion of debt on the balance sheet. This leads to high interest payments that represented 19% of operating income in Q3. The entire company has a market cap of $158 billion.
On a related note, capital expenditures will remain high. In the first nine months of this year, Verizon spent $14.2 billion to invest in its wireless networks and other technologies. Owning a capital-intensive business like this one in inflationary times is a poor use of capital, according to Warren Buffett. Having to pay higher prices can be a huge headwind for Verizon, tying up more capital that could be used to pay dividends.
Competition among telecom providers is incredibly fierce. That's because phone and internet services are commoditized offerings that are in extremely mature stages of their lifecycles, particularly in the U.S. Perhaps the most important factor driving a customer's decision to choose a carrier is price. This doesn't bode well for Verizon's ability to differentiate itself. Moreover, pricing incentives are a normal course of business.
This also means that growth will be disappointing. Indeed, Verizon's revenue of $136.8 billion in 2022 was just 8.6% more than five years earlier in 2017. Many growth-oriented investors seeking double-digit gains from their companies will find this unacceptable.
Final thoughts on Verizon shares
I think the reasons against investing hold more weight than the key reasons to buy, which are that shares are cheap and that they produce a strong dividend yield. The track record of Verizon as a wealth destroyer is alarming, particularly for buy-and-hold investors.
My goal as an individual investor is to own stocks that can outperform the market over the long term. I don't believe Verizon can help me achieve this goal.
