VZ - Crushed From $60 To $40 Is It Time To Buy 6.6% Yielding Verizon?
2024-04-30 17:34:21 ET
Summary
- Telco businesses have fallen out of favor with investors due to rising interest rates and high leverage.
- Verizon Communications Inc. is 30% undervalued and offers a dividend yield of 6.64% for income investors.
- With capex spending normalizing, Verizon is now focusing on debt repayment and restructuring efforts to improve its financial position.
- The EPS growth expected is no higher than 2% annually, but the valuation is too cheap to ignore.
Telecommunication businesses have historically been seen as popular choices of income investors thanks to their high dividend yields, even as the growth has peaked for most.
Yet, the businesses have been out of favor, ever since the Fed hiked interest rates to 525 basis points in just 16 months, to fight inflation.
The reason is twofold:
- Telcos require major capex investments in their infrastructure to keep up with the breakthroughs in technology, piling up debt which acts as an anchor on future growth. This issue is compounded when interest rates rise, increasing the interest expense in the case of floating debt.
- With higher interest rates, the demand for high-yielding stocks falls as investors have the alternative to buy treasuries or invest cash in money markets, which yields up to 5.25% without risking the capital.