Shares of Verizon Communications (VZ 2.19%) started Monday, April 22, on a low note. Investors responded to its first-quarter earnings report by pushing the stock about 3% lower in response to lackluster results.
As a well-established telecommunications provider, Verizon isn't growing very fast, but it is reliable. The company has raised its dividend payout for 17 consecutive years and at recent prices, it offers an eye-popping 6.8% dividend yield.
NYSE: VZ
Key Data Points
Is Verizon a good dividend stock to buy now? Let's weigh reasons to be enthusiastic about its future against some of the challenges it's facing to find out.
Reasons to buy Verizon
Verizon is the largest member of America's three-way telecommunications oligopoly. AT&T and T-Mobile US are trying their best to catch up, but Verizon is still the largest by revenue.
Verizon has invested heavily to upgrade its wireless network to super-fast 5G technology and it's paying off. In the first quarter, the company reported total wireless service revenue that rose 3.3% year over year. Verizon's 5G network enables a fixed wireless service that finished March with 3.4 million subscribers, over 3 million of which joined within the past two years.
Changing your phone or broadband service isn't like changing your laundry detergent. It's a hassle that most of us avoid even when there's a clear financial benefit. Steady subscription revenue has allowed Verizon to raise its dividend payout for 17 consecutive years.
The market isn't expecting a lot of growth from Verizon. After the company announced its first-quarter results, the stock fell to 8.5 times the midpoint of management's guided range for adjusted earnings this year.
Verizon isn't growing rapidly, but patient investors who buy the stock while it's trading at such a low earnings multiple can realize market-beating returns over the long run as long as earnings move in the right direction.
Reasons to avoid Verizon
Verizon stock could be a top performer if it can grow its bottom line. Unfortunately, earnings have been shrinking in recent quarters. Last year, adjusted earnings fell 6.9% to $4.71 per share and the downward trend probably isn't finished.
In the first quarter, adjusted earnings contracted by 6.8% year over year. The upper end of management's guided range for adjusted earnings this year is still $0.01 less than the company earned in 2023.
It's been more than a decade since Verizon acquired Vodafone's stake in Verizon Wireless for about $130 billion. At the end of March, there was still $126 billion in net unsecured debt on Verizon's books. A large pile of debt that isn't going anywhere fast consumes a lot of Verizon's cash flows and doesn't leave much room for new investments or dividend raises.
Verizon has a 17-year streak of annual dividend payout raises but it's only raised its payout by 10.4% over the past five years. That's way below the pace of inflation, which means investors who have held the stock over the long run are effectively receiving less now than they did in 2019.
In 2023, Verizon used 85% of the free cash flow it generated to meet its dividend obligation. That doesn't leave much cash to reduce its debt load or invest in its future. It also means the company can not safely raise its payout any faster than its overall pace of earnings growth. If earnings continue to contract or stagnate, the company might have to reduce its payout.
A buy now?
Younger investors seeking dividend payouts that can grow rapidly before they're ready to retire want to keep looking.
If you're already retired and looking for a high-yield stock to boost your passive income stream Verizon's not a bad option. Earnings aren't growing, but relatively stable cash flows from mobile and broadband subscribers give it a good chance to at least maintain its payout at present levels over the long run.
