The Rise of 5G and Fading Headwinds Make Verizon Stock a Buy
Verizon Communications Inc. (NYSE:VZ) is one of the world’s largest telecommunications companies. While the telecommunications sector transitions into the communication services sector, Verizon and rival AT&T (NYSE:T) remain two of the group’s sleepier giants. This delayed start has held Verizon stock back.
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Verizon is up 4.48% this year compared to a gain of 13.13% for the Dow and a 18.65% gain for the Communication Services Select Sector SPDR (NYSEARCA:XLC), a fund in which Verizon is a top 10 holding.
There are avenues for Verizon to shed its laggard status and deliver more upside for investors. In terms of near-term catalysts, there is Verizon’s first-quarter earnings report, slated for Tuesday, April 23. Analysts expect the company to earn $1.17 per share on revenue of $32.19 billion. In recent quarters, Verizon has delivered modest earnings surprises, slightly beating Wall Street estimates over the last four quarters.
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Calling On 5G
Another possible catalyst is the 5G rollout. As you know, 5G is the next generation of wireless communication systems, which is a significant deal for the likes of AT&T and Verizon because about 90% of Americans have mobile phones.
“The U.S. carriers have begun to move to next-generation 5G wireless networks, which promise faster data speeds and lower latency than earlier technologies,” reports Barron’s. “Verizon already has a limited commercial network up and running in some areas of Chicago and Minneapolis and is planning to cover parts of another 15 cities later this year.”
The company’s early push into 5G could payoff for VZ stock eventually, but there are still kinks that need to be ironed out, including coverage areas and upload speeds. Download and upload speeds are not be underestimated as important data points for Verizon. Mobile phone users increasingly rely on their phones for a variety of functions and with corporate customers representing significant parts of carriers’ businesses, data speeds are crucial.
According to Business Insider:
“Fast speeds are important for consumers — 81% identified a high-speed network as a must-have mobile offering, according to Business Insider Intelligence’s Telecom Competitive Edge Report (enterprise only) — and consumers could be unwilling to pay for 5G if it’s not consistently better than the current 4G LTE offering”
Verizon Versus AT&T
For better or worse, shares of AT&T and Verizon are often joined at the hip in the eyes of investors. That said, Verizon has a market value of almost $243 billion, about $9 billion ahead of its rival. Additionally, Verizon’s debt burden is $110 billion, or about $60 billion less than AT&T’s.
Those data points aside, investors are clearly favoring AT&T this year. Shares of that company are outperforming Verizon by a roughly 3-to-1 margin since the start of 2019. For now, AT&T has the more diverse revenue streams than Verizon and that may well be one reason the former is outpacing the latter this year.
“This year, Verizon is expected to generate 71% of sales from wireless services. Wireless-related business will probably be about 40% of AT&T’s revenue,” according to Barron’s.
Bottom Line on Verizon Stock
Verizon stock remains a valid choice for conservative income investors. The shares yield 4.10%, more than double the yield on the S&P 500. Verizon stock currently pays a quarterly dividend of 60.25 cents a share, representing dividend growth of just over 20% since 2012. Over the past 15 years, Verizon stock’s dividend has grown by about 50%.
Still, investors should probably temper expectations that Verizon stock will suddenly start acting like a growth stock, a style that is very much in favor right now. Investors may be more apt to reward Verizon stock if 5G shows a material impact for the company’s bottom line or if defensive, low volatility fare comes back into style.
Todd Shriber does not own any of the aforementioned securities.
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