Verizon Communications (VZ), yielding 6.6%, is the largest U.S. telecom company by 2023 revenues, with 115 million wireless retail connections, 9 million total broadband connections, and 3 million Fios video connections, notes Rida Morwa, editor of High Dividend Opportunities.

While 5G and fiber expansion have been the biggest opportunities and focus areas for telecom companies in recent years, VZ is notably making strides in its business segment with innovative deployments of private 5G.

In FY 2023, Verizon Business represented ~22% of the revenue mix ($30.1 billion) with 30 million postpaid wireless connections, and 2 million broadband connections. Within VZ Business, the enterprise and public sector constitutes 50% of the business where VZ provides network services, advanced communication services, core telecom services, and IoT services.

Private 5G is a significant growth opportunity allowing telecom companies to expand internationally without the requirement to bid for spectrum. Recently, VZ partnered with Audi to build a state-of-the-art private wireless network and tech-testing environment at Audi's automotive test track in Neustadt, Germany.

VZ is also deploying private 5G in US National Hockey League ('NHL') arenas with solid use cases like video coaching, cashless checkout, and facial-recognition-based entry for attendees. Private 5G is a significant growth opportunity, and early reports hint that VZ has closed more deals in 2024 than all of last year, with the pipeline essentially doubling.

Investors in U.S. telecom companies are generally worried about debt, especially amidst elevated interest rates. Despite having $150.7 billion net debt, only $3.6 billion of VZ's unsecured debt matures this year. The company maintains an investment-grade A- balance sheet with a net debt to adjusted EBITDA of 2.6x, and its effective interest rate for 2023 was 3.7%. Given the small amount maturing this year, we don't expect interest expenses to significantly rise.

VZ delivered its 17th annual dividend raise during Q3 2023, and its current $0.665/share quarterly payment calculates to a 6.6% yield. Notably, VZ spent $11 billion on dividend payments in FY 2023, a sum adequately covered by the company's $18.7 billion free cash flow (a 59% payout ratio) and $47.8 billion adjusted EBITDA.

With a 1-3% guidance for adj. EBITDA growth, and 8.6% lower capex for FY 2024, we expect FCF to be higher during the fiscal year. VZ's projected adjusted EPS for 2024 is between $4.5-4.7 and would comfortably support another 3% dividend raise at the same payout ratio.

At an 8.4x forward PE, VZ is a steal at current prices, and you can collect a healthy 6.6% qualified dividend to wait for the valuation reversal as all the 5G and fiber investment translates into soaring free cash flow. Overall, Verizon can provide strong income today but also continue to comfortably raise their dividend going forward, all while paying qualified dividend income, which receives beneficial tax treatment.

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