3 reasons to buy Verizon and 1 reason to sell
Verizon (NYSE: VZ) stands out as one of three companies offering 5G service in the United States. However, there are at least three compelling reasons for investors to buy these non-5G oligopoly stocks, as well as at least one hurdle that might make those same investors think twice.
Let’s take a closer look at this value of telecoms to understand if its benefits can alleviate a considerable drag on the future of this company.
Reason for purchase: Quality of service
Verizon’s focus on service is nothing new. RootMetrics recently awarded Verizon a 16th consecutive annual award for its network experience, while it won JD Power’s most award for network quality for the 27th consecutive year.
The company has also made a key investment to ensure it stays on top during the transition to 5G. At the start of the year, the company spent nearly $ 53 billion on C-band spectrum. The spectrum equates to real estate wireless, allowing Verizon exclusive use of a high-value frequency. in a specific market, and Verizon spent more on the C-band spectrum than AT&T (NYSE: T) and T Mobile (NASDAQ: TMUS) combined.
Verizon has also made a leap forward in the area of Network as a Service (NaaS). NaaS is a subscription-based data service connecting users and devices to clouds and data centers. This service can connect Artificial Intelligence (AI) and Internet of Things (IoT) based applications ranging from autonomous vehicles to digital retail platforms. It also provides the company with a source of income that did not exist under 4G.
Reason for purchase: dividend income
In addition, AT & T’s plan to reduce its dividend makes Verizon the leader in dividend-paying stocks in this industry. The company recently increased the payout for the 15th year in a row, bringing the annual payout to $ 2.56 per share, a cash return of about 4.8% for new investors.
This is important because it more than triples Verizon’s dividend over the average dividend yield for the S&P 500 by 1.3%. The rate of return also exceeds the 4% withdrawal rate recommended by investment advisers for retirees, making Verizon a likely choice for income investors. While last year’s 2% increase in payments did not match the 5.4% increase in the Consumer Price Index, the steady increases also offer income investors some protection. against inflation.
Reason for purchase: assessment against growth
Income investors can buy this income stream cheaply. As of this writing, Verizon is only selling 11 times the profits. That’s well below T-Mobile’s price-to-earnings (P / E) ratio of 38.
In addition, its latest results report indicates some underestimation. In the first three quarters of 2021, revenue of just under $ 100 billion was up 6% from the first nine months of 2020. Over the same period, net income jumped 31 % to nearly $ 18 billion. Lower interest charges, income from non-essential sources and slower growth in operating expenses account for the increase in profits.
Additionally, this led to free cash flow of just over $ 17 billion for the first nine months of 2021. This decreased slightly from the $ 18 billion free cash flow during the year. same period last year. Nonetheless, it also left enough cash to cover nearly $ 8 billion in dividend spending during that time.
Reason for the sale: debt levels
Unfortunately, Verizon needed a large chunk of the remaining free cash flow to cover its massive debts. At the end of the third quarter, Verizon had total debt of $ 151 billion. Not only is this an increase from $ 129 billion in the same period in 2020, but it is also well above total equity of just $ 78 billion.
The company has accumulated most of this additional debt with the aforementioned investment in C-band spectrum. Despite this higher debt, Verizon has spent nearly $ 3 billion in interest charges so far this year. , 13% lower than at the same time in 2020. Total debt has also started to decline from its peak of $ 159 billion in the first quarter.
Still, debt may have put pressure on the stock. It lost 9% of its value in 2021, even amid rising profits and increased adoption of 5G.
Despite its debt and stock market struggles, investors should consider Verizon stocks. Certainly, the heavy debt burden will weigh on the balance sheet for the foreseeable future. However, the company’s cash flow steadily reduces this debt, and the investment in spectrum should pay off in improving the quality of service.
Double-digit percentage profit growth in the middle of a P / E ratio of 11 could also attract investors to the stock over time. Considering the nearly 5% dividend yield, this could potentially make Verizon one of the smartest dividend stocks to buy.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.