Verizon (VZ -0.78%) has long been a favorite among dividend investors due to its classic high-yield, blue-chip status. However, in recent years, the stock has faced significant challenges, resulting in a decline that left many investors wary. Factors like slowing growth in the wireless industry, increased competition, and weakening consumer demand have all contributed to Verizon’s struggle, mirroring similar challenges faced by its rival, AT&T (NYSE: T).
Despite the hurdles, Verizon’s stock now trades at an attractive forward price-to-earnings (P/E) ratio and offers a compelling dividend yield of 7.7%. While the overall revenue has been affected by declining legacy wireline business and equipment sales, there are positive signs of stability. Core wireless service revenue has shown growth, and the company foresees further expansion. Moreover, Verizon’s efforts to reduce debt and improve profitability through cost-saving initiatives are underway. However, recent developments have also raised concerns, highlighting the potential risks that could impact the stock’s recovery. In this article, we explore the factors affecting Verizon’s stock and analyze whether it presents a buying opportunity for investors seeking dividends and a potential turnaround.
The Path to Recovery: Positive Indicators
Verizon’s wireless service revenue continues to grow, showcasing a 3.8% increase in the second quarter, with a forecast for further growth of 2.5% to 4.5% in 2023. Although net income and earnings per share (EPS) are still in decline, the company has shown improvement in free cash flow, a critical metric for dividend investors. With a rise in free cash flow and an optimistic outlook on capital spending and savings, Verizon’s financial health appears to be on the mend.
Addressing Debt Burden and Environmental Concerns
Verizon has made strides in reducing its debt burden, with net debt decreasing by $3.2 billion to $126.6 billion in the quarter. While this is encouraging, the company faces environmental concerns due to lead-sheathed cables left behind, potentially polluting the nation’s water supply. Verizon’s management addressed this issue, but the financial impact of cleanup remains uncertain.
Amazon’s Partnership and Industry Pricing Implications
The recent partnership between Amazon and DISH Network, offering wireless service at an attractive price, has raised concerns about potential industry pricing pressures. While the initial impact was shrugged off by investors, the long-term implications could be significant if the partnership attracts a substantial customer base.
Favorable Metrics for Dividend Investors
Verizon’s dividend payout ratio appears favorable, with EPS guidance indicating a payout ratio of just 55%. This suggests the company can comfortably fund its dividend while retaining funds for debt reduction and stock repurchases. Additionally, Verizon stands to benefit from the economic recovery and a potential decline in interest rates, making its dividend yield more attractive compared to bond rates.
The Potential Turnaround
Verizon stock may not have reached its bottom yet, but there are signs that it could be near. Improved cash flow forecasts and ongoing cost-saving measures are promising indicators. For dividend investors seeking a high yield and the prospect of a turnaround, Verizon may be worth considering as an investment opportunity.
Conclusion
Verizon’s stock has faced challenges in recent years, leading to a decline in value. However, the current attractive valuation, coupled with positive signs of stabilization and financial improvements, make Verizon a compelling option for dividend investors. While there are concerns to address, such as environmental issues and competitive partnerships, the company’s focus on reducing debt and enhancing cash flow bodes well for a potential recovery. As with any investment decision, careful consideration of the risks and opportunities is essential. For those seeking high yield and the possibility of a turnaround, Verizon stock presents an intriguing opportunity.
