With a market cap of $156.86 billion, Verizon Communications Inc. (VZ) is a leading provider of communications, information technology, and entertainment products and services to consumers, businesses, and governmental entities globally. The company is scheduled to report fourth-quarter 2023 earnings on January 23, 2024.
Analysts expect VZ’s revenue and EPS for the fourth quarter (ending December 2023) to decline 2% and 8.9% year-over-year to $34.55 billion and $1.08, respectively.
For the fiscal year 2023, Street expects the company’s revenue to decrease 2.5% year-over-year to $133.47 billion. The consensus EPS estimate of $4.69 for the current year indicates a decline of 9.4% year-over-year.
Shares of VZ have plunged nearly 1% over the past five days but gained more than 2% over the past six months. On the other hand, the benchmark S&P 500 has surged approximately 1.7% over the past five days and more than 9% over the past six months.
While VZ’s stock has underperformed the S&P 500 lately, the telecom company remains attractive for income-focused investors, given its reliable dividend.
Now, let’s review the key factors that could influence VZ’s performance in the near term:
Mixed Last Reported Financial Results
For the third quarter that ended on September 30, 2023, VZ reported revenue of $33.34 billion, slightly surpassing analysts’ estimate of $33.31 billion. However, this compared to the revenue of $34.24 billion in the same quarter of 2022. The decline was primarily due to reduced wireless equipment revenue and lower postpaid upgrade activity.
But the company’s wireless service revenue came in at $19.30 billion, up 2.9% year-over-year. This increase was mainly driven by targeted pricing actions implemented in recent quarters, the larger allocation of administrative and telco recovery fees from other revenue into wireless service revenue, and growth from fixed wireless offerings.
During the quarter, total broadband net additions were 434,000, representing the fourth straight quarter in which Verizon reported more than 400,000 broadband net additions. Total broadband net additions included 384,000 fixed wireless net additions, an increase of 42,000 fixed wireless net additions from the third quarter of 2022.
The telecom giant currently has nearly 10.3 million total broadband subscribers, including around 2.7 million subscribers on its fixed wireless service. The company reported 72,000 Fios Internet net additions, up from 61,000 Fios Internet net additions in the prior year’s quarter.
Verizon’s third-quarter operating income declined 5.3% year-over-year to $7.47 billion. Its net income was $4.88 billion, a decrease of 2.8% from the prior year’s quarter. The company posted an adjusted EPS of $1.22, surpassing the consensus estimate of $1.18, but down 7.6% year-over-year.
The company’s adjusted EBITDA for the quarter grew 0.2% year-over-year to $12.20 billion. Its year-to-date cash flow from operations was $28.80 billion, up from $28.20 billion in 2022. Also, free cash flow year-to-date totaled $14.60 billion, an increase from $12.40 billion in the prior year.
VZ’s unsecured debt as of the end of the third quarter decreased by $4.90 billion sequentially to $126.40 billion. At the end of third-quarter 2023, the company’s ratio of unsecured debt to net income (LTM) was nearly 5.9 times, and its net unsecured debt to adjusted EBITDA was approximately 2.6 times.
Raised Free Cash Flow Guidance
“We continued to make steady progress in the third quarter with a clear focus on growing wireless service revenue, delivering healthy consolidated adjusted EBITDA and increasing free cash flow,” said Verizon Chairman and CEO Hans Vestberg.
After reporting solid third-quarter results momentum, Verizon raised its free cash flow guidance for the full year 2023. The company expects free cash flow above $18 billion, an increase of $1 billion from the previously issued guidance. Cash flow from operations is expected in the range of $36.25 billion to $37.25 billion.
In addition, for 2023, the company expects total wireless service revenue growth of 2.5% to 4.5%. Its adjusted EBITDA and adjusted EPS are projected to be $47-$48.50 billion and $4.55-$4.85, respectively.
Attractive Dividend
On December 7, VZ declared a quarterly dividend of 66.50 cents ($0.665) per outstanding share. The dividend is payable on February 1, 2024, to Verizon shareholders of record at the close of business on January 10, 2024.
“We are committed to delivering value to our customers and shareholders as we execute on our focused network strategy,” said Hans Vestberg. “Our financial discipline and strong cash flow continue to put the company in a position for the Board to declare a quarterly dividend.”
Verizon has around 4.2 billion shares of common stock outstanding. The company made more than $8.2 billion in cash dividend payments in the last three quarters.
VZ pays an annual dividend of $2.66, which translates to a yield of 7.13% at the current share price. Its four-year average dividend yield is 5.42%. The company has raised its dividend for 17 consecutive years, the longest current streak of dividend increases in the U.S. telecom industry.
Progress in 5G Network Buildout
On December 21, Verizon announced the expansion of its reliable 4G and high-speed 5G service throughout Florida, Kennesaw, GA, and Aiken County, SC, among other areas.
This service is part of the company’s massive multi-year network transformation, which has not only brought 5G service to more than 230 million people and 5G home internet service to nearly 40 million households but has also added more capabilities, upgraded the technology in the network, paving the way for personalized customer experiences and offering a platform for enterprises to boost innovation.
According to a report by Grand View Research, the global 5G services market is projected to reach $2.21 trillion by 2030, expanding at a CAGR of 59.4% during the forecast period (2023-2030). Meanwhile, North America 5G services market is expected to grow at a CAGR of 51.6% from 2023 to 2030.
The growing demand for high-speed data connectivity worldwide, rising investments in 5G infrastructure, and rapid integration of advanced technologies like IoT and AI are estimated to propel the adoption of 5G services. Verizon is well-positioned to capitalize on the significant 5G adoption and fixed wireless broadband network momentum.
Fierce Competition
While Verizon continues to accelerate the availability of its 5G ultra-wideband network across the country, the company faces heightened competition from wireless industry players, including AT&T, Inc. (T), T-Mobile US, Inc. (TMUS), Vodafone Group Plc (VOD), and SK Telecom Co., Ltd. (SKM).
Mixed Historical Growth
VZ’s revenue grew at a CAGR of 1.5% over the past three years. But its EBIT decreased at a CAGR of 0.3% over the same period. The company’s net income and EPS improved at CAGRs of 4.5% and 4% over the same time frame, respectively.
Further, the company’s levered free cash flow increased at a CAGR of 20.1% over the same period, and its total assets improved at a CAGR of 9%.
Robust Profitability
VZ’s trailing-12-month gross profit margin and EBIT margin of 58.69% and 22.87% are 20% and 183.1% higher than the industry averages of 48.90% and 8.08%, respectively. Likewise, the stock’s trailing-12-month net income margin of 15.58% is significantly higher than the industry average of 3.21%.
Additionally, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 22.56%, 7.04%, and 5.43% are considerably higher than the respective industry averages of 3.41%, 3.55%, and 1.24%. Its trailing-12-month levered FCF margin of 13.31% is 73.9% higher than the industry average of 7.65%.
Mixed Valuation
In terms of forward non-GAAP P/E, VZ is currently trading at 7.95x, 49.1% lower than the industry average of 15.62x. The stock’s forward EV/EBITDA of 6.96x is 20.3% lower than the industry average of 8.73x. Also, its forward Price/Book and Price/Cash Flow of 1.57x and 4.23x compared to the industry averages of 1.99x and 10.03x, respectively.
However, the stock’s forward non-GAAP PEG multiple of 32.47 is significantly higher than the industry average of 1.54. Its forward EV/Sales of 2.49x is 34.7% higher than the industry average of 1.85x.
Analyst Price Targets
On December 19, Oppenheimer analyst Timothy Horan maintained a Buy rating on VZ and set a price target of $43 on the stock. In addition, Verizon received a Buy rating from Citi’s Michael Rollins in a report issued on December 13. However, Well Fargo maintained a Hold rating on VZ’s stock.
Bottom Line
Verizon’s disciplined approach to driving strong cash flow, operating the business, and serving its customers allowed it to raise its dividend for the 17th consecutive year.
However, analysts appear bearish about the telecom company’s near-term prospects. Verizon’s revenue and EPS growth will likely face challenges, and this slowdown is primarily attributed to fierce competition from leading industry players such as AT&T and T-Mobile, which are consistently undergoing significant changes in their operations.
Given slowing revenue and EPS growth, heightened competition, and mixed valuation, it seems prudent to wait for a better entry point in this stock.
