It’s been a while since shareholders of telecom giant Verizon Communications (VZ) have had reason to celebrate, notes Jim Pearce, editor of Investing Daily's Personal Finance.
Despite the long-awaited promise of what 5G (fifth generation) technologies would do for the company’s income statement, its share price has fallen steadily over the past three years. Since peaking above $61 in December 2020, VZ fell below $31 in October of this year before finding a bottom.
It now appears that Verizon’s massive investment in 5G is starting to pay off. On October 24, the company released its fiscal 2023 Q3 results that were headlined by a 21% jump in broadband subscribers to 10.3 million.
Over the first nine months of this year, Verizon booked a $600 million increase in cash flow from operations and its free cash flow was $2.2 billion more compared to the previous year. From an earnings perspective, this year’s third quarter came in a bit lower than last year with $1.13 in EPS (earnings per share) versus $1.17 in 2022.
Also, total operating revenue of $33.3 billion during the quarter was 2.6% less than last year’s amount. Over the first nine months of this year, Verizon’s cash flow from operations improved markedly from $14.6 billion this year versus $12.4 billion last year.
Those numbers were respectable, but what got Wall Street’s attention was Verizon’s guidance for its full year results including a $1 billion increase in its $18 billion estimate for free cash flow. At the same time, the company reiterated its expectation to deliver EPS of $4.55 to $4.85 driven by a 2.5% to 4.5% gain in total wireless service revenue growth.
It did not take long for the algorithms on Wall Street to react to that news. That day, VZ jumped more than 8% on twice its average daily trading volume. Even after that rise to $34, Verizon’s forward annual dividend rate of $2.66 works out to a forward annual dividend yield of 7.8%. That is more than 50% above its trailing 5-year average annual dividend yield of 5%.
Until now, Verizon’s high dividend yield was viewed by Wall Street as a bribe to keep its shareholders in the fold while the company retooled its balance sheet. But now that the company’s investment in 5G is starting to pay off, investors should be willing to accept a lower dividend yield in exchange for share price appreciation.
To be clear, I am not suggesting that Verizon will cut its dividend. In fact, the company’s Board approved a slight increase in its quarterly cash dividend from $0.6525 to $0.6650 per share during the third quarter. And with its cash flow rising faster than expected, it is likely that the company will raise its dividend payment again next year.
That being the case, Verizon is either a value trap or is severely undervalued. I see no reason to believe that its operating metrics will regress next year, so I am inclined to think that VZ will rise steadily as its quarterly results reflect continued growth in its broadband businesses. Verizon remains a buy.
