Verizon Calls on Growth, Yield and Cash Flow

09/22/2020 5:00 am EST

Focus: TELECOM

Joseph Bonner

Senior Analyst: Communications & Technology, Argus Research Corporation

It was predictable that Verizon Communications (VZ) would experience a tough second quarter given its broad exposure to both the consumer and business economies, suggests Joseph Bonner, an analyst with Argus Research, a leading independent Wall Street research firm.

While Verizon stores have begun to reopen and are using new sales tactics like curbside pickup to adjust to the “new normal,” customer behavior has been significantly affected by the pandemic.

The highly defensive change in customer behavior has depressed revenue, but may also freeze industry conditions as most customers stay with their existing carriers. This could be a positive for Verizon as the wireless industry’s leading incumbent.

As the macro-economy slowly recovers and work-at-home becomes the “new normal,” connectivity is more critical than ever for both consumer and businesses.

While wireless industry competition has slackened over the last few quarters, Verizon continues to face intense industry competition on price, data usage, and ease of network connectivity.

In particular, the company has been forced to join peers in providing unsubsidized phone plans and lower rates on its unlimited data plans, which have weighed on organic revenue, margins, and earnings.

At the same time, Verizon continues to rely on its superior network quality as a primary differentiator in the market, and is in the early stages of a 5G rollout, which it sees as a differentiator in the coming years.

The company is also trying to monetize content through alliances, including with YouTube TV and Disney +, rather than trying to buy content assets.

It was badly burned by its 2015 acquisition of AOL and 2017 purchase of Yahoo!, which led to 2018’s massive write-down. We think the company has mostly put its unfortunate forays into owned media behind it as it refocuses on network quality and its 5G buildout.

On September 3, Verizon increased its quarterly cash dividend by $0.125 or 2% to $0.6275 per share, or $2.51 annually, for an indicated yield of about 4.1%.

We are raising our 2020 dividend estimate to $2.47 from $2.46 to conform to the new dividend increase and raising our 2021 estimate to $2.52 from $2.49. Verizon has increased its dividend at a 2.3% compound annual rate over the last five years.

We are raising our rating on Verizon to "buy" with a target price of $68. We remain heartened by the company’s continued strong balance sheet and robust free cash flow. We also think the Verizon dividend is safe with the recent dividend increase reinforcing our opinion.

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