Shares of telecom giant Verizon Communications Inc. (VZ, Financial) dropped more than 3% after the company’s top line missed analyst expectations on Tuesday. The stock has been on the decline over the last seven days, edging down nearly 8%, and now looks set to hit new multi-month lows if the trend continues.
While Verizon revenues disappointed, the company’s profits did provide some positivity with earnings beating expectations by 3 cents per share.Â
Nonetheless, Verizon offers more to investors than just capital gains and this is one of the reasons shareholders might want to consider holding on to this telecommunications giant. Verizon is one of the best dividend-paying stocks in the telecom industry. It does this comfortably (at a payout ratio of about 30%) without upsetting the dividend payout to earnings retention balance.
At the current dividend yield of about 4.52%, the recent slip in stock price could be a perfect opportunity to add to portfolio holdings, especially given the company’s expected investments and the solidification of its business moat over the next several years.
Verizon Communications, alongside AT&T (T, Financial), is one of the leading early investors in the 5G wireless network, which is expected to take network services to the next frontier. The two companies have already started to run field trials while Japan and South Korea are also looking to be among the early adopters.
The company's capital expenditure is projected to increase this year (expected to be $17 billion to $18 billion compared to last year’s $16.7 billion) due to investments in networks. Last October, Verizon became the first company in the world to commercially deploy the 5G network with its 5G home. Earlier in the year, the company was also the first to complete an overlay of data transmission on the 5G global standards and the first to complete a 5G data session on a smartphone.
Clearly, Verizon is leading the market in terms of 5G network adoption, which will translate to great success in the coming years. In today's markets, speed is everything. Everyone wants to move fast, complete transactions quicker and transfer huge amounts of data as quickly as possible. The 5G wireless networks will play a crucial role in this paradigm shift as computing and data move to mobile devices.
While most investors may have looked at the revenue miss as a major drawback to Verizon’s recent earnings results, the company actually did make a major improvement when compared to the previous two years. In 2016, the company posted a revenue decline (from $131 billion in 2015 to $125 billion) and in 2017, there was no major movement (revenue came in at $126 billion).
Revenue in 2018 increased to $131 billion, which means there has progress since the 2016 slump. Over the next two years, however, the company expects to witness modest top-line growth, which could explain why some shareholders are not too eager to add to their holdings.
The company’s adoption of the new rules on revenue recognition also played a role in the mixed results reported for fourth-quarter and full-year 2018. Revenue from telecommunication equipment and all other types of deferred revenues were most affected by these changes. Verizon reported that its 2.1% year-over-year revenue growth excluded “the impact of the revenue recognition standard, to $24.3 billion.”
The new rules for revenue recognition, which went into effect last year, are expected to continue causing some investor confusion for the foreseeable future. Every listed company is expected to have assessed its impact on top-line growth by the end of fiscal 2019, depending on the reporting schedule.
Therefore, it is clear the new revenue recognition rules had an impact on Verizon’s top line, and there could be still some confusion about how to analyze revenue growth in the market. The bottom line is Verizon has some interesting network projects in the pipeline and, supplemented by its compelling dividend yield, it would be unwise to ditch the stock solely based on the recent revenue miss.
Disclosure: I have no positions in the stocks mentioned in this article.
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