Verizon: A Cash Cow with a Solid Dividend

Verizon (VZ) is one of the largest wireless carriers in the United States. The company’s network covers more than 300 million people and 98% of the country. Verizon is now in the process of expanding its 5G Ultra-Wideband in numerous cities as it advances towards rolling out its 5G service.

Verizon has historically been a very stable and reliable investment. Due to its essential telecom service, it enjoys predictable and reliable cash flows. Because its cash flows are very consistent, it has allowed the company to pay hefty dividends throughout the years.

With VZ shares sliding lower over the past year, the stock’s yield has now climbed close to 5%. In my view, Verizon’s dividend offers high levels of tangible capital returns in the current environment of ultra-low yields and high inflation levels. The stock is also trading at rather attractive valuation levels.

That said, due to the lack of extraordinary return potential I am usually looking for at a stock, I am neutral on Verizon. (See Analysts’ Top Stocks on TipRanks).

Q3 Results: Solid and Steady 

Verizon Q3 results held no surprises, with the company delivering another solid report. Revenues increased by 4.3% to $32.9 billion, while adjusted EPS came in at $1.41, 13% higher year-over-year.

The company achieved wireless retail postpaid net adds of 699K, beating analyst estimates of 566K. Compared to the previous quarter, retail postpaid phone churn increased two basis points to 0.74%, while the total retail postpaid phone churn came in at 0.94%. Still, these rates are quite satisfactory, in my view.

Consumer revenues grew 7.3% to $23.3 billion, fundamentally driven by higher rates amid an increasing 5G-phone penetration and 98K Fios net additions. Nonetheless, business revenues slipped 0.8% to $7.7 billion, despite featuring 276K wireless retail postpaid net additions.

Amid better-than-expected results, management hiked its full-year guidance. Verizon now expects adjusted EPS of $5.35 to $5.40 (previously $5.25 to $5.35).

The Dividend and Valuation 

Verizon features a 10-year EPS and dividend per share (DPS) CAGR ratio of 7.9% and 2.54%, respectively. In addition, the company features a robust track record of 15 annual consecutive dividend increases.

At the same time, due to EPS growing faster than DPS over the past decade, Verizon has reduced its payout ratio from around 231% in 2011 to a much more comfortable 48% this year based on management’s outlook.

While the growth rate of DPS hikes may not be fascinating, the company’s solid yield and 2%+ annual hikes should provide a reliable income to investors, especially if inflation levels normalize.

Based on, again, management’s guidance midpoint, Verizon is trading at a P/E of 9.5 at the stock’s current price of ~$50.6. This makes for a very enticing valuation multiple, in my view, considering the overall expanded valuations in the market these days.

Further, this multiple is substantially lower than the stock’s historical average, which usually hovers in the low teens. Hence, there is a possibility that a valuation expansion adds to total returns in the medium term.

Wall Street’s Take

Turning to Wall Street, Verizon Communications has a Moderate Buy consensus rating, based on two Buys and five Holds assigned in the past three months. At $59.43, the average Verizon Communications price target implies 17.4% upside potential.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

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