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Stocks paying high dividends will always be popular with investors seeking a steady stream of passive income. The telecom sector in particular is well-known for offering rich dividend yields - which, given the lackluster growth forecasts for the group, is a key part of the appeal when it comes to attracting new investor interest to these stocks.
With that said, here's a closer look at one of the biggest names in the telecom space - not just in terms of size, but in terms of dividend yield. In fact, following the recent dividend cut by retail pharmacy company Walgreens Boots Alliance (WBA), this communications giant now offers the fattest yield on the Dow Jones Industrial Average ($DOWI).
About Verizon
Formed at the turn of the millennium as a merger between Bell Atlantic and GTE Corp, Verizon Communications (VZ) is one of the largest telecommunications companies in the world. The company offers a range of services including wireless, internet, and business solutions. The company operates through two key segments: Verizon Consumer Group and Verizon Business Group. Moreover, its 5G coverage is extensive, having already achieved 98% coverage in the U.S. It currently commands a massive market cap of $159.34 billion.
Verizon's strategic moves have been a key contributor to its market dominance. For instance, its popular myPlan provides customers with value, control, and simplicity amid times of still-high inflation and reduced discretionary consumer spending. Verizon recently announced a new offering for its myPlan customers where ad-supported tiers of Netflix (NFLX) and Max (WBD) will be offered at $10 a month.
Moreover, the company is making substantial investments in the C-band spectrum to rapidly develop its 5G services with a focus on fixed wireless access and business wireless opportunities. The company aims to cover 250 million people with 5G service by the end of 2024.
Due to its strong position in the telecom space as an entrenched player with extensive network coverage, and innovation capabilities along with its expertise in providing reliable and high-speed wireless services, Verizon is well-equipped to meet escalating connectivity requirements.
Verizon Stock: Attractively Valued with a 7% Yield
Verizon stock is down 7.7% over the past year, which lags the broader market's performance.
However, its dividend yield now stands at 7.02%, which is even higher than rival AT&T (T). Verizon has been raising its dividend for the past 19 years - and with a payout ratio of about 55% and robust free cash flow levels, additional dividend hikes should be well-supported going forward.
Verizon is also attractively priced at current levels. The stock's forward price/earnings ratio is 8.08, its price/book is 1.61, and price/cash flow is 4.29. These valuation multiples represent a discount not only to communications sector medians, but Verizon's own five-year averages.
Verizon Hikes Free Cash Flow Forecast
Verizon's latest results for Q3 2023 beat Wall Street's expectations on both the top and bottom lines. Operating revenues slowed by 2.6% from the previous year to $33.34 billion, but still edged past expectations. Likewise, EPS of $1.22 was down 7.6% from the prior year, but surpassed the consensus estimate of $1.18. In fact, the company's EPS has topped expectations in each of the past five quarters.
Further, the company closed the quarter with total broadband net additions of 434,000 subscribers. This marked an impressive fourth consecutive quarter of 400,000+ broadband net additions for the company, and Verizon now has a total of 10.3 million total broadband subscribers, with nearly 2.7 million on its fixed wireless service.
Additionally, the company reported net additions of 151,000 in Q3, which was the 9th consecutive quarter with 125,000+ additions.
Further, retail average revenue per user (ARPU) improved on both prepaid and postpaid fronts. Verizon reported retail postpaid and prepaid ARPUs of $156.13 and $31.87, denoting yearly growth of 4.2% and 2.2%, respectively.
Although the company's debt remained high at $122.2 billion, it repaid $2.6 billion of debt in Q3. Moreover, Verizon has remarkable cash-generating capabilities. Its Q3 free cash flow surpassed consensus estimates by roughly $1.3 billion, and the telecom also hiked its full-year free cash flow forecast.
Overall, the company closed the quarter with a healthy cash balance of $4.2 billion.
What Do Analysts Expect for Verizon?
Overall, analysts remain upbeat about Verizon, which has a consensus rating of “Moderate Buy” with a mean target price of $41.69. This represents an upside potential of about 8.1% from current levels.
Out of 19 analysts covering the stock, 6 have a “Strong Buy” rating, 3 have a “Moderate Buy” rating, and 10 have a “Hold” rating.
