Verizon Communications (VZ) is the second-largest telecommunications company in the United States by market capitalization, behind only AT&T (T), explains Ben Reynolds, editor of Sure Retirement.
One of Verizon’s key competitive advantages is that it is often considered the best wireless carrier in the U.S. This is evident by the company’s wireless net additions and very low churn rate.
This reliable service allows Verizon to maintain its customer base as well as give the company an opportunity to move customers to higher-priced plans.
Verizon ranks highly in terms of recession resilience. The company’s earnings declined by less than 10% during the Great Recession of 2007-2009. It is a conservative option for investors looking to generate high portfolio income.
Consumers will likely always want their smartphones and connected devices, even in an economic downturn. We believe the company is likely to pay out just 50% of its adjusted earnings-per-share in 2020, which means the dividend is highly secure.
Verizon’s major growth catalysts are new services, such as 5G. Verizon was the first of the major carriers to turn on 5G service and brought 5G to 31 cities by the end of the year. Its industry-leading network quality should provide growth opportunities.
Cost cuts will add to Verizon’s earnings growth. Verizon also announced a $10 billion cost savings program over the next several years.
We expect that Verizon will deliver earnings-per-share of $4.95 for 2020. Using this estimate, the company is trading at a p/e ratio of 12. For context, Verizon traded at an average price-to-earnings ratio of 14 over the last decade, which results in a fair value target of $69 for this diversified telecommunications business.
Therefore, we view Verizon as a slightly undervalued stock. An expanding valuation would add about 3.1% to the company’s annualized returns through 2025.
We also expect earnings growth and dividends to contribute to total returns. Between valuation expansion (3.1%), expected EPS growth of 4%, and the 4.1% current dividend yield, Verizon stock could generate total annual returns of 11.2% over the next five years.
