Is Verizon’s 7% Yield Too Good To Pass Up?

Key Points

• Verizon is a blue-chip tech stock paying more than 7% in yield. 
• The analysts view the stock as undervalued at current levels and see nothing but upside for share prices. 
• Institutions are buying Verizon and helping to mark a bottom. 

Shares of Verizon NYSE: VZ have been shedding value for more than 2 years, and that trend could continue, but there are a growing number of signs that suggest the bottom is in. Among them is the 7% dividend yield which is well above the broad market average, better even than short-term treasuries and CDs, and there is a good chance for capital appreciation over time. The stock is down not because the company is ailing but because it’s a behemoth incapable of producing significant growth, and macro-headwinds are impacting the results.

The takeaway for investors is that price action is overextending at historic low levels, the dividend is safe, analysts see an upside, the institutions are buying, and the dividend is as reliable as ever. 

Verizon Could Outperform In Q2 

The 15 analysts with current ratings on Verizon have the stock pegged at Hold, which is firming compared to earlier in the year. The current consensus is $46.12, which is still trending lower, but there are some telling indications in the data. The pace of the downtrend in the Marketbeat.com consensus figure has slowed considerably; most of the 2023 targets are consistent with the consensus figure, the consensus suggests 33% of upside is possible, and even the low price target is above the current price action.

This suggests the stock is extremely undervalued at current levels and could rebound without a catalyst. If a catalyst were to emerge, the rebound could be vigorous.   

The analysts aren’t expecting much from Verizon in Q2. The company is scheduled to report in late July, and the analysts have been lowering their targets over the past month. Verizon is expected to produce more revenue sequentially than Q1 but flat-to-down compared to last year, with earnings falling slightly sequentially and YOY.

The opportunity here is twofold due to the lingering strength in consumer spending and the downward trend in analysts' expectations. Verizon could beat on the top and bottom lines producing a catalyst for higher share prices. 

The institutional activity is suggestive as well. The institutions have been buyers on balance for 7 of the last 8 quarters and 12- and 24-month periods. The action is mixed in Q2 but roughly balanced following a spike in buying during Q1. Q1 saw the institutions net $7.3 billion of shares, or about 5% of the market.

This has their holdings up to 61% of the company, and they may be expected to begin buying again now that share prices are setting new lows. 

Verizon Is A Deep Value At 7X Its Earnings 

Verizon isn’t a growth company but is blue-chip tech and the US largest mobile operator with a healthy and large dividend distribution. Trading at 7X earnings is worth less than half the S&P 500 average while paying more than 3X the yield. The yield is also growing but not quickly, which may also have impacted the share price over the past 2 years.

Regardless, the company is paying only 52% of its earnings, so it should sustain the 2% distribution CAGR for the foreseeable future. Verizon has increased its payout for 18 consecutive years and will become a Dividend Aristocrat in 2030. 

The technical setup is another opportunity for income investors willing to take on some risk. The weekly chart shows the market has found support near $34.50, which may be strong enough for the market to bottom. The market made a new low last week, but it is divergent from the MACD and stochastic, which confirms underlying strength within the market.

If this is real, the market should move sideways from here and possibly edge higher as the Q2 earnings report draws near.