The telecommunications sector is ripe with competition, with products and services becoming increasingly commoditized. As a result, major players in the space are forced to compete on price -- a dynamic that can impact a company's bottom line.
But amid the competitive landscape, one company in the industry looks potentially undervalued. Verizon Communications (VZ 0.40%) may not be a company that is synonymous with monster growth, but its combination of strong cash flow and a high dividend yield could make it attractive for passive income investors.
Let's dig into Verizon's business and assess why 2024 could be a great time to open a position.
NYSE: VZ
Key Data Points
Cash flow is king
In addition to competition from the likes of AT&T, T-Mobile, and Comcast, Verizon also faces intense pressure from the rise in streaming services. This has caused customer churn to increase, which impacts the company's revenue and profitability. Unsurprisingly, Verizon's top line has decreased about 3% year over year through the first nine months of 2023, which ended Sept. 30.
But even as revenue decelerates, Verizon has found ways to sustain robust free cash flow. Through Sept. 30, Verizon's total free cash flow increased 18% year over year to $14.6 billion. The consistent generation of cash flow not only allows Verizon to pay off its debt but also to reward shareholders in the form of a dividend.
Image source: Getty Images.
Take note of the dividend
VZ Dividend data by YCharts
The chart above illustrates Verizon's dividend growth during its tenure as a public company. The basic takeaway is that throughout its corporate history, Verizon has demonstrated its commitment to loyal shareholders time and again. In fact, back in September, Verizon increased its dividend for the 17th consecutive year. That milestone alone makes me feel pretty confident that the company's dividend isn't going away.
The valuation is compelling
VZ PE Ratio (Forward) data by YCharts.
The chart above shows that Verizon's forward price-to-earnings (P/E) ratio of 8.3 is far below its 10-year average. Moreover, it also pales in comparison to competitors T-Mobile and Comcast, which trade at forward P/E ratios of 20.7 and 11.2, respectively.
The deterioration of Verizon's forward P/E ratio makes sense on some level, given the amount of competition among other telephone companies and streaming platforms. However, I think that these concerns are rooted more in perception as opposed to reality -- thereby cratering Verizon's stock to overly depressed levels.
I think you'll be hard-pressed to find a company that manages cash flow such that paying a dividend isn't in jeopardy even in the face of decelerating revenue. While the stock is likely not going to handily beat the S&P 500, dividend investors might be eager to scoop up shares at its current 7% yield. Furthermore, with valuation levels below long-term averages, as well as other competing telco providers, Verizon stock looks pretty cheap. Now could be a great opportunity to begin dollar-cost averaging into a position at a bargain price.
