Over Sold and Left for Dead, High Yield Verizon Raises Guidance

Key Points

• Verizon has a decent quarter, proving it can improve cash flow and free cash flow for investors. 
• The stock rebounds from historic lows; the deep value may not last much longer. 
• Verizon pays more than 8.4% in yield with a positive outlook for sustained distribution growth. 

Verizon NYSE: VZ stock presents a compelling value-to-yield combination that should have the market for this stock boiling. The stock trades at a ridiculously low 7X its earnings while paying nearly 8.5% in yield. If this were some fly-by-night investment vehicle, the yield would be a red flag, but it's not.

Verizon is the nation's 2nd largest mobile carrier and will likely maintain its position despite the best efforts of T-Mobile US NASDAQ: TMUS. T-Mobile US is a solid growth story, but it comes with a high price tag and no dividend. The point is that Verizon is a solid, blue-chip, dividend-paying stock that has been left for dead, and that is an opportunity that investors may not want to pass up. 

This raises the question of why Verizon shares were sold off to the point of extreme value, and the answer is simple: sluggish growth and no catalyst to get the market’s attention. But that may have changed. Verizon’s Q3 results include rays of sunshine that suggest the dividend and dividend growth outlook are reliably safe.

Among them is an increase in free cash flow guidance, which most impacts a company’s ability to return capital to shareholders sustainably. 

Verizon Shares Rebound on Earnings Strength 

Verizon didn’t have a smashing quarter, but results were favorable, suggesting a bottom may be in for the market. The company reported $33.33 billion in net revenue for a decline of 2.7% compared to last year, which is exactly as expected. 

The business is driven by a 21% increase in broadband subscriptions, which marks the 4th consecutive quarter of net gains above 400K. Wireless, the bulk of the business, also grew and helped to underpin the strength. Revenue weakness was seen in equipment revenue and post-paid upgrades. 

The margin news is what got the market excited. Verizon has been working to improve cash and free cash flow and has made significant progress. Cash flow improved by 212 basis points despite the top-line weakness, aided by pricing actions and growth in the wireless business, while FCF grew by $2.2 billion or nearly 20% compared to last year.

The strength is also seen on the bottom line, with GAAP and adjusted Earnings exceeding consensus, adjusted by 340 basis points. 

Regarding the guidance, the company reiterated its expectations for revenue and earnings, which bracket the consensus estimate with room for outperformance. The market-moving news is the FCF outlook, which increased by $1 billion or nearly 6% to more than $18 billion. 

Analysts and Institutions Call the Bottom in VZ 

The analysts have yet to issue updates following the Q3 release, but they will unlikely alter their message. That message is Verizon is at least a Hold, verging on Moderate Buy, with nowhere to go but up, with shares trading at a 12-year low. 

The consensus target is down compared to last year, but that doesn’t matter anymore because it is firm for 2023 and expects at least a 35% upside for the market, and the low target is still well above the price action. The low target of $36 implies at least a 12% upside for VZ shares, and we may see upward movement in the data now that results and guidance are in.

Institutions are also buying the stock, have bought on balance for most of 2023, and purchases more than double sales over the last 12 months. 

The Technical Outlook: Verizon is Hammering Out a Bottom 

The price action in VZ surged nearly 5% in premarket action to confirm support at a critical level. This level is near $31.50 and marks the most recent bottom for the market. This bottom is consistent with support levels set in 2010-2011 and comes with divergent indicators on monthly, weekly, and daily charts. The technical picture suggests this market is deeply oversold and ready to rebound vigorously, given the proper catalyst.