VZ - Verizon: Management Shakeup Underscores Lack Of Growth Catalysts

2023-03-06 09:54:58 ET

Summary

• High-dividend stocks have been sour so far in 2023 after a strong 2022.
• Verizon now sports a historically-high payout ratio, but I continue to see few upside drivers.
• The technical picture remains in favor of the bears as a trading range develops. I outline key price levels to monitor.

High-dividend stocks posted a banner year in 2022. On a relative basis, the iShares Core High Dividend ETF (HDV) rose more than 30 percentage points on the S&P 500 (total return) last year. 2023 is a different story, though. The fund is off by about 10% compared to the SPX as the long-duration tech trade has returned to favor. Also potentially dinging high-yield names is the rise in short-term rates as investors no longer must look to equities and junk bonds for a 5%-plus yield. Treasury bills now offer that opportunity.

Amid these macro shifts, I continue to see Verizon (VZ), a large position in HDV, as a hold on valuation while the technicals remain soft.

High-Dividend Equities Struggle in 2023

According to Bank of America Global Research, Verizon is one of the largest US telecom companies. It offers voice, data, and video services and solutions. Its Consumer division includes wireless and wireline operations with 114.6mn wireless connections and 7.3mn broadband connections. The Business division provides wireless and wireline services to business, government, and wholesale customers and has over 28mn connections.

The New York-based $161 billion market cap Diversified Telecommunication Services industry company within the Communication Services sector trades at a low 7.6 trailing 12-month GAAP price-to-earnings ratio and pays a high 6.8% dividend yield, according to The Wall Street Journal.

In its Q4 report , the management team re-focused its priorities on 2023 being an “execution year,” but I still do not see a driver of the next growth avenue for the firm. Also, with some executive changes lately, the path ahead remains murky. That report included reduced numbers for this year while withdrawing its longer-term growth forecast. The firm continues to be plagued by high costs related to its 5G network rollout and management.

On valuation , analysts at BofA have reduced their earnings estimates since I last profiled the name. This year’s and 2024’s EPS are now seen well under $5 and below the Bloomberg consensus forecast. Looking ahead to 2025, per-share profits are seen as basically unchanged from where they are now.

VZ trades 10x free cash flow, so that’s a high FCF yield which should support dividend hikes in the quarters ahead, continuing Verizon’s more than 16-year track record of increasing pay-outs. And with single-digit earnings multiples and a below-market EV/EBITDA, the tepid bottom-line growth rate is largely discounted in my view.

Verizon: Earnings, Valuation, Dividend Forecasts

I am tempted to give the stock a better multiple for the valuation based on its 5-year average valuation metrics. Notice below that the trailing and forecasted P/Es are at notable discounts, near-zero growth leads to a high PEG.

But even on a price-to-sales ratio basis, the stock is arguably cheap if the new management team can find some growth catalysts and regain market share. Finally, the yield is much higher than average, and depressed price/cash flow ratios support that yield. It might just take one or two growth sparks to warrant a higher fair value multiple. But we aren't there yet.

VZ: Depressed Valuation Ratios vs Sector & Its Historical Average

Looking ahead, corporate event data provided by Wall Street Horizon shows a confirmed Q1 2023 earnings date of Tuesday, April 25 before market open with a conference call immediately after the numbers hit. You can listen live here . Before next month’s earnings, Matt Ellis, EVP and CFO had been scheduled to speak at the Morgan Stanley Technology, Media, and Telecom (TMT) Conference on Tuesday this week at 11:00 AM PST (2 PM ET), but the CFO announced his departure from the firm last week, so it remains to be seen if VZ will participate at the event.

Corporate Event Risk Calendar

The Options Angle

Looking ahead to the April earnings report, data from Option Research & Technology Services (ORATS) show a $1.19 consensus EPS forecast which would be a 12% drop from the same period a year ago. VZ has a strong earnings beat rate history, missing estimates in just 1 of the previous 12 quarters. Shares also do not move much around earnings – though the Q1, Q2, and Q3 reports last year featured significant dips on the respective reporting dates.

Options traders have priced a slightly elevated 4.7% earnings-related stock price swing when analyzing the at-the-money straddle expiring soon after the April 25 reporting date. That might be on the expensive side as recency bias could be kicking in. Selling premium makes sense to me here, and we have a trading range around which to play that. Also consider that broad market volatility is not all that high right now.

VZ: Somewhat Expensive Options Ahead of Earnings

The Technical Take

In October, I highlighted that support entered the picture in the mid-$30s while the mid-to-upper $40s was resistance. Indeed, the bulls defended support while the bears sold the stock at nearer-term resistance around the $42 to $43 zone. That is the trading range right now, so selling $42 calls and $35 puts could be a play here for those long the stock.

Notice in the chart below that the falling 200-day moving average also comes into play right at the 2015 and 2017 lows (which was the turn-of-the-year peak) at $42. While the valuation is not bad, the technicals suggest the onus is on the bulls to reverse the downtrend.

VZ: A Developing Trading Range Under Ample Supply of Shares

The Bottom Line

I reiterate my hold recommendation. While I suspect there could be a growth catalyst at some point to warrant a fair P/E near 10, it just has not materialized yet. Moreover, the chart is neutral to bearish right now ahead of next month’s earnings.

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