Should Verizon Be In Your Income Portfolio?

Key Points

• Verizon is a deep value and a high yield that could enhance any income portfolio. 
• Q1 results are better than expected, with the stock moving up from the bottom. 
• Even the analysts' low price target assumes fair value, so the market only has upward to move. 

Verizon NYSE: VZ is a high-yielding dividend stock that income investors should consider. The company isn’t able to grow substantially or revolutionize markets, but it does make money and pays a high 7% dividend yield. The yield is primarily due to the valuation, the company’s stock price has plummeted and trading at only 8X earnings, and it is a growing distribution. 

Verizon has increased its distribution annually for more than 15 years and can be expected to continue for the foreseeable future. The caveats are the debt load and distribution CAGR. The company carries a whopping $132 billion in debt, but it is well-managed and leaves room in the cash flow for capital returns. The distribution CAGR is only 2%, which is not much and well below the pace of inflation, but it's growth on top of the initial 7% you get with ownership. 

The analysts are Holding Verizon, which is saying something because Marketbeat.com is tracking 19 with current ratings. There hasn’t been much activity since the first of the year, but the takeaway is they’re still Holding and see some upside potential for share prices. The consensus price target is just about $47.00, which implies about 26% of the upside for the market, and even the low target of $37 assumes the stock is fairly valued. The site hasn’t picked up any new commentaries following the Q1 release, but it is safe to assume it won’t cause significant negative revisions. 

Verizon Has Mixed Quarter; Shares Move Higher 

Verizon had a mixed quarter, with revenue of $32.9 billion missing the consensus target by a wide margin, but that is the worst news. The revenue is down 1.9% compared to an expectation for low-single-digit growth, but internal metrics are favorable, the margin is impressive, and the guidance was OK. The revenue was driven by a 3% increase in wireless revenue that offset to some degree a 1.7% decline in Consumer and a 2.8% decline in Business revenue. New additions drove wireless growth. Net adds increased by 437,000 to outpace consensus by over 100 basis points. 

"Our operational and financial results reflect the steps that we have taken to improve our performance. Compared to this time last year, we have added more postpaid phone gross additions to our network and have increased our cash flow from operations and free cash flow," said Verizon Chairman and CEO Hans Vestberg. “Last month, we announced that our 5G Ultra Wideband now reaches more than 200 million people as we continue to undergo the most aggressive network deployment in our company's history."

The margin news is also mixed, but the takeaways are positive for shareholders. The adjusted EBITDA fell by -1.1% but outpaced revenue declines by 80 bps, net income rose by 6.5%, cash flow improved by 23%, and FCF rose $1 billion to $2.3 billion or 77%.

The guidance is also favorable to shareholders. The company isn’t expecting robust growth in 2023, but 2.5% to 4.5% is OK in light of the broad S&P 500 growth expectations. That is coupled with an EPS outlook of $4.55 to $4.85 per share, which nicely brackets the $4.69 consensus figure. The takeaway is that growth is on the table, and earnings are sufficient to cover the dividend, although aggressive increases are likely off the table.  

The Technical Outlook: Verizon Bottoms But Will It Bounce? 

Shares of Verizon have bottomed and appear to be at a firm support level, but a bounce may not come. The stock is under much pressure due to its debt load and CAPEX plans, including expanding the 5G network. Shares may be range bound at current levels until later in the year or even next year when spending slows, or a slowdown in spending is at least in the outlook.