5G to IoT: New Catalysts for Verizon

11/20/2019 5:00 am EST

Focus: TELECOM

Ben Reynolds

CEO, Sure Dividends

Verizon Communications (VZ) is one of the largest telecom companies in the United States based on market cap; its wireless segment contributes approximately three-quarters of its aggregate revenue, notes Ben Reynolds, income expert and editor of Sure Dividend.

Verizon has grown its earnings-per-share by approximately 5% per year over the last decade. We believe that this rate of growth is sustainable for Verizon over full economic cycles.

Future growth will be driven by the continued strength of its wireless segment, as well as new initiatives such as the introduction of a 5G network. Another growth catalyst for Verizon is the Internet of Things (IoT), which will power connectivity beyond just smartphones and tablets.

Verizon has made multiple acquisitions to boost its IoT business in recent years including the $2.5 billion acquisition of Fleetmatics and the $900 million acquisition of Telogis.

However, given its scale, lower interest rates, and a worse outlook for the global economy, we believe growth will slow slightly to 4% per year.

Verizon scores very well on all our important measures of dividend safety. The company is on pace for a payout ratio of just 51% in fiscal 2019. Moreover, the company has increased its dividend for 12 consecutive years and is likely to continue to pay rising dividends for the foreseeable future.

Lastly, Verizon consistently operates with a high interest coverage ratio. The company’s combination of safety and yield make it a compelling investment for risk-averse income-focused investors.

Verizon traded at an average P/E ratio of 14 over the last decade. If the company’s P/E ratio can expand to its 10-year average over the next five years, this will increase Verizon’s total returns by about 2.2% per year.

Through a combination of dividend payments, earnings growth, and valuation expansion, Verizon appears capable of delivering annual total returns of approximately 9.5% over the next five years.

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