While Verizon Communications Inc. (VZ, Financial) has reached a stage where investors do not expect astronomical growth from the company, recent developments call for a second look at this telecom major. Fundamentally sound numbers coupled with a few competitive advantages position it as one of the top players capable of generating alpha in the sector.
Verizon's plan to roll out its 5G home internet service in October has kept the stock in the spotlight. The company generates a major chunk of its revenues from the wireless business, which has been witnessing slight declines over the last two years as a result of several competitive and industry-specific factors. That is likely to change with the 5G offering, however, which will first be introduced in Houston, Indianapolis, Los Angeles and Sacramento, California.
In addition, the company plans to spend $17.9 billion this year to maintain and upgrade its digital infrastructure, including the 5G infrastructure. The company believes the plan will help it gain and retain customers, while also allowing it to increase prices as the number of internet-connected devices grows.
After receiving three free months of service, the company said subscribers to Verizon's 5G broadband service will pay $50 per month if they are existing customers. Non-Verizon customers will pay $70 a month. Verizon said subscribers should expect average speeds of 300 megabits per second and peak speeds of 1 gigabit per second.
AT&T (T, Financial) CEO Randall Stephenson was quick to dismiss Verizon’s 5G service as non-standard, given it is not available on mobiles yet. While AT&T plans to introduce its 5G offering by end of the year, it's yet to be seen which telecom major will be the first to roll out a widespread mobile service. Verizon is positioning itself as the leader in this segment of the market as it believes its mix of spectrum, fiber and small cell technology will enhance its services.
Looking ahead, Verizon expects revenue to grow 4% this year and 1% next year. Moreover, as a result of tax reform, earnings are forecasted to grow 24.5% this year and only 2% next year.
Compensating for the steep decline in future earnings and revenue growth, however, is Verizon’s reputation as a top dividend payer. The telecom major's dividend currently yields 4.6%, more than any other Dow component and more than 50% higher than the 10-year Treasury bond yield.
Coming to valuation, Verizon currently floats a price-earnings ratio of 7.28 as compared to the industry median of 19.33. The forward price-earnings ratio stands at 11.45 as compared to the industry median of 19.53, positioning Verizon as a fairly undervalued play. Moreover, its operating margin of 20.03% is above the industry median of 10.31%.
All told, Verizon seems to be in a solid position right now. Moreover, its 5G pricing appears to be competitive as Comcast (CMCSA, Financial) charges $60 per month for 250 megabits per second stand-alone broadband. In addition, the company's strong fundamental position coupled with immense growth prospects for its wireless and wireline segments support the optimistic stance of the Street.
Disclosure: I do not own any of the stocks mentioned.
