Investors should buy stocks with a long-term mindset. The stock market is irrational. It does silly things and can lift shares of poor businesses while punishing good ones, sometimes for reasons not apparent to the naked eye. It can take time for things to sort themselves out.
But you also have to acknowledge that poor businesses are often bad investments, no matter how much time you give them. U.S. telecom giant Verizon Communications (VZ 0.99%) is a household name.
Yet, it seems investors constantly overlook how bad the stock has been, and for how long. If you had invested $100 into Verizon in 1990, you'd have $780 today from share price growth and dividends. That sounds great -- until you find out that the S&P 500 index would have turned that same $100 into $2,733.
What's the reason for Verizon's shockingly poor performance, and what does it say about its future?
3 reasons for Verizon's troubles
Stocks don't just automatically go up if you wait long enough. A company must grow and create value to justify a higher share price. Verizon has grown over the years, especially over the past two decades, which saw smartphones become a must-have for nearly all Americans. Verizon's revenue has increased more than tenfold since 1990.
NYSE: VZ
Key Data Points
But growth alone isn't enough. Verizon's first big problem is that the company has struggled to generate much value over the years. What does that mean, value? Ideally, a business puts resources to work and generates a return -- for example, putting a dollar in and generating two dollars in return.
This can be scored using a company's return on invested capital. Since 1990, Verizon has returned an average of $1.07 back for each dollar it puts into the company. That's not great. It must balance expensive investments in upgrading and maintaining its network with price-conscious customers. It's a tough business.
VZ Return on Invested Capital data by YCharts
A tough business requires top-notch management to stretch every dollar and make strategic decisions that add value to the company. Verizon's whiffed here, too, at times. Management has gradually loaded the balance sheet to roughly three times debt-to-EBITDA, twice as much leverage as Verizon had 10 years ago.
Expensive acquisitions have also seemingly missed the mark. Verizon bought prepaid phone carrier TracFone Wireless in 2020 for over $6 billion. However, Verizon has been bleeding prepaid customers, losing over a million prepaid customers over the past year. It bought AOL and Yahoo for about $9 billion between 2015 and 2017, only to sell them off at a loss in 2021.
Poor execution in a challenging telecom business has hurt Verizon's earnings growth, and that's the third reason the stock has trailed the market. Despite over 1,000% revenue growth since 1990, earnings per share have grown by just 280%.
Verizon's price tag is cheap. Or is it?
Those optimistic over Verizon stock might point to the stock's hefty dividend and cheap valuation. After all, the current dividend yield is a whopping 7%, and shares trade at a price-to-earnings ratio of just 8 times 2023 earnings.
But even that can be a bad deal if the business isn't growing. Analysts believe Verizon will have virtually zero earnings growth over the coming years. In other words, Verizon's dividend is about what investors can expect for investment returns. The stock price has only risen 50% since 1990! That won't change dramatically unless Verizon can figure out how to grow its profits.
VZ PE Ratio (Forward) data by YCharts
In other words, investors should expect more of the same. Verizon is a high-yield dividend stock that offers little else to investors. A dividend alone isn't enough, which is why Verizon has severely lagged the broader market over time. Given the muted outlook, a wireless business losing customers, and a bloated balance sheet, investors should consider looking elsewhere.
