2023-09-28 09:20:14 ET
Summary
- Verizon Communications is a global telecommunications company providing wireless communications and digital entertainment services.
- Verizon Communications' financial results for the second quarter of 2023 presented a mix of positives and negatives.
- For seventeen years, Verizon has consistently adhered to a policy of progressively boosting its dividend payouts annually, providing investors with a notably generous 8% dividend yield.
- Despite all the difficulties Verizon Communications has encountered in recent years, we are starting its coverage with an "outperform" rating for the next 12 months.
Verizon Communications (VZ) is one of the world's largest telecommunications companies, headquartered in New York City, playing a key role in providing wireless communications and digital entertainment services to tens of millions of people in North America.
Despite the increased competition in the global telecom services market, the company has been committed to introducing the most advanced technologies, including the fifth generation of cellular network technology, for the past ten years. With the expansion of its industry-leading 5G network in the United States, Verizon is allowing customers to enjoy the high-speed data experience desperately needed in today's fast-paced world. In addition, the company has numerous partnerships with small and medium-sized businesses, providing conferencing services, Internet Protocol networking, cloud storage and computing services, and more.
Despite the ongoing euphoria in financial markets due to a surge in public interest in technology companies, Verizon Communications is considered a defensive stock due to its ability to generate stable cash flow even during rising inflation, pandemics, and a slowing economic recovery.
For seventeen years, Verizon has consistently adhered to a policy of progressively boosting its dividend payouts annually, providing investors with a notably generous 8% dividend yield. This steadfast commitment of the company's management to increase dividend payments is one of the crucial theses that attract long-term investors.
Despite a slight decline in the company's margins in recent quarters, Verizon Communications' top five shareholders still include the following well-known Wall Street financial mastodons. These stockholders are Vanguard Group, State Street, Charles Schwab Investment Management, Geode Capital Management, and Blackrock, collectively owning a substantial 24.74% stake in the company.
Author's elaboration, based on Yahoo Finance
Verizon Communications' financial results for the second quarter of 2023 presented a mix of positives and negatives. While the company's revenue beat analysts' forecasts, it also continued to experience EPS declines for several consecutive quarters, causing concern among investors.
On October 24 , Verizon will publish its financial report for the third quarter of 2023, which, in our opinion, should please investors with continued strong demand for fixed wireless products and Fios services.
According to Seeking Alpha , Verizon's third-quarter 2023 revenue is expected to be $32.99-$34.01 billion, down 1.5% year-over-year and 0.81% below analyst expectations for the prior quarter. At the same time, by our model, the company's total revenue will be within this range, amounting to $33.35 billion. While Verizon's revenue declined year-over-year, we expect revenue growth quarter-over-quarter to be driven by higher pricing for postpaid plans, as well as increased demand for TravelPass due to increased international travel by customers in the post-COVID-19 era. These factors, in particular, will mitigate our expected decline in wireless device sales.
Author's elaboration, based on Seeking Alpha
On the other hand, Verizon Communications' Q2 2023 operating income margin stood at 23%, showing a modest increase compared to Q2 2022. However, this financial indicator continues to remain significantly higher compared to the communications sector, thereby indicating the effectiveness of the company's management even despite rising inflation in North America.
Author's elaboration, based on Seeking Alpha
Overall, we project Verizon Communications' operating income margin will reach 23.5% by the end of 2023. In 2024, we anticipate a rise in this financial metric to 24.1%, primarily due to several factors. These include a boost in the influx of new clients, enhanced efficiency in managing labor expenses, and the beginning of an interest rate cutting by the Federal Reserve System. The latter factor, in particular, is essential because it will help accelerate the pace of US economic recovery, which will ultimately affect the growth in demand for the company's wireless and wireline services.
According to Seeking Alpha , Verizon's Q3 EPS is expected to be $1.14-$1.28, up 1.7% from the Q2 2023 consensus estimate. At the same time, according to our model, Verizon's EPS will be $1.21, remaining unchanged compared to the previous quarter.
Author's elaboration, based on Seeking Alpha
Moreover, the company's Non-GAAP P/E [TTM] is 6.71x, which is 46.04% lower than the sector average and 36.03% lower than the average over the past five years. On the other hand, Verizon Communications' Non-GAAP P/E [FWD] is 7.01x, which is one of the factors indicating its significant undervaluation by Mr. Market.
However, one of the key risks for the company remains the growth of its debt from year to year, which also negatively affects its net profit. At the end of the second quarter of 2023, Verizon Communications' total debt was $182.3 billion, an increase of $3.36 billion over 2021. Even after EBITDA stabilized in recent quarters, the company's total debt/EBITDA ratio increased from 3.54x to 3.81x.
Author's elaboration, based on Seeking Alpha
Conclusion
Verizon Communications is one of the world's largest telecommunications companies, headquartered in New York City, playing a key role in providing wireless communications and digital entertainment services to tens of millions of people in North America.
Persistent global inflation, which is prompting central banks to again consider raising interest rates, is also causing Verizon's total debt/EBITDA ratio to continue its upward trajectory. This escalating ratio poses a significant risk and is dampening financial market participants' enthusiasm for the company.
As a result, since the beginning of this year, the company's share price has fallen by more than 19%, underperforming such major competitors in the communications sector as Deutsche Telekom (DTEGY), BCE (BCE), and Swisscom AG (SCMWY).
Author's elaboration, based on Seeking Alpha
Despite all the difficulties the telecom giant has faced in recent quarters, its management continues to increase dividend payments yearly. Thanks also to its extremely high dividend yield, which exceeds 8%, and its authorized share repurchase program, we are starting our coverage of Verizon Communications with an "outperform" rating for the next 12 months.
For further details see:
Verizon Communications: Uncovering The Telecom Giant's Hidden Potential