Verizon: 5% Dividend and 5G Tailwinds 

Verizon is a titan of the telecom industry

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Jun 20, 2022
Summary
  • Verizon is one of the world’s largest telecom providers. They are currently building out their 5G network and aim to become the backbone of the industry.
  • Warren Buffett has bought and sold Verizon at various times over the past few years. 
  • Consumer segment revenue jumped by a healthy 10.9% year over year, which is great for a legacy company. 
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Verizon (VZ, Financial) is one of the world’s largest telecommunications providers, operating primarily in the U.S. The company is currently expanding into 5G and aims to become the backbone of the industry.

Warren Buffett (Trades, Portfolio) has had an on and off relationship with the company, over the past few years. Berkshire Hathaway (BRK.A)(BRK.B) was first buying shares of Verizon back in 2014, when price averaged $47 per share. Then just a couple of years later, in 2016, Buffett sold almost the entire position at a around the same price point. Buffett once again loaded up on shares in the third quarter of 2020, before again selling out of almost 99% of his entire position in the first quarter of 2022.

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The question is, why did Buffett decide to sell the stock after such short-term holding periods? The guru could have sold for a variety of reasons, including opportunity cost. It's possible that selling so quickly may have been a mistake, in my opinion, Verizon has strong 5G tailwinds and pay an extremely good 5.16% dividend, making it attractive despite the capital-intensive nature of the business.

Business model

Verizon is a titan of the telecommunications industry. As the largest wireless carrier in the U.S., they have over 90 million phone customers across three main segments: Consumer, Business and Government. They also have a fixed line telecoms service in the Northeast of the U.S., which makes up 12% of revenue. In addition, Verizon has an online media arm, Verizon Media, which was formed after acquisitions of AOL and Yahoo. The scale of Verizon is vast and they currently employ over 118,000 people.

The future for Verizon is their “Network as a Service” strategy. They have bold plans to build out their 5G network. The company even went as far as to purchase the “mid band” 5G spectrum and wants to cover over 50 million households with home broadband by 2025. This is a brilliant strategy as fixed line broadband could be disrupted over the next few years, bringing in extra revenue.

Other applications include the enabling of IoT (Internet of Things) devices and multi-access edge computing (MEC). MEC has the power to bring low latency internet and applications to your pocket. I recently saw an interview with a company which aims to use the power of Verizon MEC to power 360 live stream cameras for sports events so people can really feel like they are there with full immersion. Verizon has recently scored partnerships with Cisco (CSCO, Financial) and CelonaI to help make applications like these a reality.

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Source: Verizon investor relations

Financials

Verizon is a legacy company with high debt but very reliable profitability. Revenue was fairly stable at $32 billion for the first quarter of 2022, while consumer revenue jumped by a healthy 10.9% year over year, which is great for a legacy company. They are on track to reach at least 175 million POPs (Point of Presence) by the end of 2022

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Verizon has great margins overall with a 54% gross margin and a 24% operating margin.

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They also pay a fantastic 5.16% dividend. Even if capital gains aren't likely to be impressive, this is the kind of dividend that typically serves as an excellent bond proxy.

Verizon’s free cash flow decreased substantially from $5.1 billion in the first quarter of 2021 to just $1 billion in the first quarter of this year. They have made large investments into 5G infrastructure, which has resulted in their cash position declining from $10.2 billion to $1.7 billion. These investments could prove very lucrative in the long term, but they are encumbered with $135 billion in net unsecured debt. The silver lining is this represents a net unsecured debt to adjusted Ebitda ratio of 2.8, which is slightly better than the prior year.

Valuation

In terms of valuation, Verizon currently trades at a price-earnings ratio of 9.63, which is cheaper than historic averages.

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The GF Value chart, a unique intrinsic value estimate from GuruFocus, rates the stock as modestly undervalued at the time of writing.

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Verizon's telecoms business is a dying breed, and they are having to spend huge amounts of capital just to stay relevant, but their large investments into 5G could pay off. Verizon’s 5G network could act as a virtual “toll road” for the autonomous vehicle providers of the future. However, there is still a long road and many challenges ahead for the company. Their large amount of debt could be a drag, and Buffett selling out could also be a red flag that this may not be a good long-term investment.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure