It hasn't been easy being a shareholder in Verizon Communications (VZ 0.22%). The networking and communications giant has been a poor performer.
The numbers don't lie. If you had invested $10,000 into this telecom stock a decade ago and reinvested your dividends, you would be sitting on a position worth $12,600 today. If dividends were excluded, you would've experienced a 22% loss. For comparison, an S&P 500 index fund, with dividends reinvested, would've tripled your money during that same time.
What issues have been holding back Verizon stock over the past decade? And is this a stock that investors should consider buying right now?
Verizon's disappointing financials
From a business perspective, Verizon's financial trends have been poor. For example, from 2013 to 2022, its revenues only increased by 14% in total. Plus, the company's diluted earnings per share rose by just 28% over the period.
But why have its financials been so subpar? I think there are two reasons.
The first is the nature of the industry in which it operates. The end market for its bread-and-butter segment, wireless services, is very mature. In Q3, its wireless services revenue grew by just 2.9% year over year to $19.3 billion.
To its credit, Verizon is focusing more on growing its non-wireless operations, like broadband internet, where its subscriber count increased by 21%. But this can't really offset the burden faced by the entire business.
It also doesn't help that more than 90% of the U.S. population already has a smartphone, which limits Verizon's growth potential.
A saturated market opportunity is a worse situation for growth when coupled with intense competition, which is the other headwind Verizon continues to face. There are smaller regional players, as well as nationwide heavyweights like AT&T and T-Mobile. Readers are likely familiar with the aggressive promotional activity and discounts offered by these companies to lure customers from competing service providers. This situation isn't going to change anytime soon.
NYSE: VZ
Key Data Points
Is now a good time to buy the stock?
Despite the challenges that Verizon faces, some might still find the stock an attractive buying opportunity right now. It currently trades at a price-to-earnings ratio of 7.8. That's below its 10-year average. Also, at its current share price, the dividend Verizon pays yields a hefty 6.9%. Investors who care more about generating steady income from their holdings will find this compelling.
Since Verizon delivered its latest earnings report on Oct. 24, the shares have performed well. They are up by 13% from where they stood previously, mainly because the business beat Wall Street's estimates for both revenue and earnings per share. This could be the start of better days for the stock.
However, I would avoid Verizon stock. As a long-term investor who aims to beat the overall market's performance, I view it as a poor investment opportunity.
The lack of meaningful growth potential for the company and the intense competition in its industry aren't favorable characteristics by any means. These realities are exacerbated by the fact that Verizon is engaged in a capital-intensive business. Capital expenditures through the first nine months of 2023 totaled $14.2 billion, accounting for 14% of revenue.
Verizon must constantly spend on acquiring new wireless spectrum and developing new technologies like 5G. This explains why the enterprise carries nearly $140 billion of debt on its balance sheet.
Verizon's track record of disappointing its shareholders over the past decade speaks for itself. Given the option today of investing $10,000 in either an index fund that tracks the S&P 500 or Verizon stock, I'd choose the former without any hesitation.
