Investors will likely remember 2023 as the year artificial intelligence (AI) found footing in the market. With the excitement generated by ChatGPT, investors have rushed into many prominent AI stocks.
Such price action may persuade investors to make a New Year's resolution to buy a specific stock. Verizon (VZ 0.50%) is one to consider. Investors hammered it as debt costs and growth struggles weighed on the telecom stock. Nonetheless, thanks to a critical piece of news, this stock is likely to surge higher in the new year for one key reason.
Why is 2024 the time for Verizon?
Admittedly, after years of declines, one can understand some hesitation to buy Verizon. The stock has fallen 35% over the last five years as slow customer growth, competition from T-Mobile and AT&T, and the massive capital costs in a nearly continuous process of network upgrades weighed on the company.
NYSE: VZ
Key Data Points
Consequently, Verizon managed to rack up nearly $147 billion in debt, and that is without the costly moves into pay TV and content that have hurt AT&T. Over the next year, almost $13 billion in debt will come due on debt ranging from 1.625% to 4.073% in interest costs.
Hence, unless it reduces or eliminates the dividend, which is on track to cost it $11 billion in 2023, Verizon will likely have to turn to the capital markets to refinance most of the debt at higher rates. Worse, it could have to keep repeating this process in subsequent years.
The good news
However, Federal Reserve Chairman Jerome Powell has held the federal funds rate steady and indicated the Fed will reduce it three times in 2024. That move could reduce the effect of the higher rates as it issues new debt.
Moreover, lower rates could improve Verizon's revenue prospects. Businesses had cut back on activity with the higher cost of borrowing, but lower rates could mean that they'll resume spending.
This is important because J.D. Power has named Verizon No. 1 for network quality 31 consecutive times. Networks like Verizon's support AI-driven activities, and such accolades could make it the best-positioned telecom company to attract that business.
AI has also helped foster an additional source of revenue for Verizon. Its 5G network can support AI-driven tasks such as repetitive work and bring insights and innovation in real time, making Verizon's network a critical component of increasing productivity.
As a result, enterprises as diverse as Honda Motor Company and Arizona State University rely on Verizon's 5G to support connectivity and IT-related functions that are critical for AI to work. Attracting similar clients will almost certainly make Verizon's 5G network and the application of AI more critical.
How that may benefit shareholders
As such benefits become more evident to investors, more people and entities may want to become Verizon shareholders. In the recent past, its price-to-earnings (P/E) ratio of just under 8 did not attract investors due to slow growth and high debts. Still, if AI-driven applications start to spur more revenue growth, investors will probably respond positively to the low earnings multiple.
Investors may also be in better shape with regard to the dividend. After 17 yearly increases, the annual payout of $2.66 per share amounts to a dividend yield of over 7%, nearly five times the S&P 500 average of 1.5%.
Admittedly, one could argue that eliminating the dividend helps Verizon stock since it makes faster debt reduction possible. Still, lower debt costs make it less costly to maintain a payout, which could preserve the stock's appeal to income investors.
Consider Verizon
Verizon's support of AI-driven applications makes its stock more appealing under current conditions. Since it leads in network quality, it has already begun to serve the 5G-related AI needs of clients, a business that will likely grow.
With the added prospect of falling interest rates, adopting that technology could accelerate. Moreover, lower rates should make the company's debt load more manageable, increasing the shareholder appeal of Verizon stock in the new year.
