While most people probably associate the telecommunications sector with their smartphone, the industry has actually been around since the late 1870s. Today, companies in this sector are often involved in the internet and cable TV businesses in addition to mobile phones.
Operating in this sector requires a vast amount of capital to maintain and buildout operations. Even after that, growth rates aren’t all that high. With high barriers to entry, the telecommunications sector is controlled by just a few players. Fortunately for income investors, there are several names in this sector that offer a high dividend yield.
One of our favorite telecommunication stocks is Verizon Communications (VZ, Financial).
Company background
Verizon in its current form is the result of a merger between Bell Atlantic Corp. and GTE Corp. in June of 2000. Today, Verizon’s wireless business accounts for three-quarters of all revenue. Broadband and cable services contribute the remainder of revenue. Verizon’s network covers 298 million people in the U.S. and 98% of the country. The company trades with a market capitalization of $230 billon, with more than $130 million in sales in 2018.
While other companies in the telecommunications sector have purchased media assets in recent years, Verizon has focused its efforts on rolling out 5G. The company expects at least 30 cities in the U.S. will have 5G mobile connections by the end of the current year. Twenty of these cities will have Verizon’s Ultra Wideband 5G service. In recent weeks, St. Paul, Minnesota; Denver, Colorado; and Providence, Rhode Island have all had their 5G Ultra Wideband service activated.
Verizon is the first among the large carriers to roll out 5G and expects that mobile connections will grow at a rate of 9% over the next three years.
Recent financial results
Verizon released first-quarter earnings results on April 23. The company earned $1.20 per share, which was 4 cents higher than consensus estimates. It was also an increase of 2.6% from the first quarter of 2018. The company’s revenue of $32.1 billion was a 1.1% improvement from the prior year and in-line with what analysts had expected.
The wireless business' revenue totaled $22.7 billion, which was a 4% improvement from the previous year. Verizon had 61,000 net retail postpaid additions during the quarter. The company’s 261,000 connected device net additions were offset by 156,000 tablet and 44,000 phone net losses. Verizon also added a net 174,000 postpaid smartphones subscribers. This helped keep the churn rate low at 0.84%. Also aiding results were higher priced plans, which helped grow service revenues by 4.4%.
Verizon’s wireless business did not fare as well. Revenue decreased 3.9% to $7.3 billion. This segment did add 52,000 Fios connections, but also lost a net 53,000 Fios video subscribers. However, Fios revenues did increase 3.6% to $3.1 billion.
Due to first-quarter results, Verizon raised its expectations for earnings-per-share growth for the year to a low single-digit rate from 2018. The company had expected earnings per share to be flat year-over-year. We assume that the company will deliver $4.80 per share this year, which would be an increase of 2% from 2018.
We estimate that Verizon can grow earnings per share at a rate of 4% annually over the next four years, which is slightly below its historical growth rate of 5%.
Dividend analysis
Verizon has increased its dividend for the past 14 years, making the company a Dividend Achiever. Companies in this index have increased their dividends for at least a decade.
Verizon has compounded its dividend:
- By a rate of 1.2% over the past three years.
- By a rate of 1.9% over the past five years.
- By a rate of 2.4% over the past 10 years.
The company most recently increased its dividend by 2.1% for the Nov. 1 payment. While Verizon doesn’t offer much in terms of dividend growth, it does offer a 4.3% yield. This is more than twice the average yield of the S&P 500 index.
Verizon also has a relatively safe dividend. The company is expected to pay out at least $2.41 in dividends per share in 2019. Using our expected earnings per share of $4.80 for the year, this equates to a payout ratio of just 50%. For context, the company’s average payout ratio over the last five years is 58% and 10 years is 69%. This shows that Verizon’s dividend payout ratio measures up well against its own history.
Using free cash flow, Verizon’s dividend also appears safe. The company produced $2.8 billion of free cash flow in the first quarter while paying out $2.5 billion in dividends for a payout ratio of 89%. This is very high and could be a cause for concern if not for the longer-term view for free cash flow. Over the last 12 months, Verizon has generated $18.4 billion of free cash flow and paid out $9.8 billion in dividends for a payout ratio of 55%.
The longer view of free cash flow means that the company’s dividend is well covered.
Valuation and total expected returns
Verizon’s stock finished the July 22 trading session at $55.50. Based on of our projected earnings per share of $4.80 for the year, the stock has a price-earnings ratio of 11.6. Shares have traded with an average valuation of 14x earnings over the last decade. Returning to this level by 2024 would add 3.8% to annual returns.
Total annual returns over the next five years for Verizon are projected to include:
- 4% earnings-per-share growth.
- 4.3% yield.
- 3.8% multiple expansion.
Verizon is forecasted to return 12.1% annually through 2024. Stocks with at least 10% returns are rated as a buy by Sure Dividend. Verizon’s projected total return qualifies it to receive a buy rating.
Final thoughts
Verizon’s stock is known for its yield, but closer examination of the company and stock reveal that it has the potential to offer a very solid return over the next five years. The company’s most recent quarterly report showed its typical low percentage improvements from the previous year. But with a leadership position in 5G and a low valuation, the stock is likely to offer double-digit returns going forward.
While the telecommunications company isn’t necessarily known for its return, we feel that Verizon is a solid combination of earnings growth, dividend yield and multiple expansion. Investors are encouraged to consider purchasing shares of Verizon as we believe it is one of the best telecommunications stocks for growth and dividends.
Read more here:Ă‚
Why Tanger Factory Outlets Centers Is Our Top High-Yield Blue ChipÂ
The 3 Top Stocks for Dividends Every Calendar MonthÂ
Why Uber Won't Turn Into a Dividend Growth InvestmentÂ
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
