So far this year, Verizon Communications Inc. (NYSE:VZ) has been moving in the opposite direction of the broader market — which happens to also be the wrong direction. While the Dow Jones Industrial Average, which Verizon is a component of, has gained over 7% since the start of the year, shares of VZ stock are more than twice as far in the red over the same time period.
Verizon’s decline, though, offers a great deal for income investors. At current prices, VZ stock yields almost 5.1% and there are plenty of reasons to think organic stock growth could soon accompany that outsized payout.
In the first quarter, Verizon reintroduced its unlimited plan — a move that has already proven to be a positive move for customer additions and loyalty. As the first-quarter earnings report — which unfortunately contributed to the downward slide — pointed out:
“Prior to the launch in mid-February, Verizon had a retail postpaid phone net loss of 398,000; after the launch, Verizon added 109,000 retail postpaid phone connections.”
Rival Merger Worries
While the telecoms provider was pushed to reintroduce the unlimited plan in response to competition from Sprint Corp (NYSE:S) and T-Mobile US Inc (NASDAQ:TMUS), Jefferies analyst Mike McCormack says Verizon’s plan is more profitable. In his words:
“We find that, at the average of [about] three lines per account, the more rational pricing of AT&T Inc. (NYSE:T) and Verizon would suggest the plans are accretive.”
On top of that, while some investors may be worried about a potential merger between Sprint and T-Mobile, another analyst suggests that, too, is good news. Morgan Stanley analyst Simon Flannery recently advised clients “we would expect Verizon’s stock to benefit from any agreed merger between T-Mobile and Sprint, primarily on the hope that the industry could become more rational.”
The cherry on top is the strength of Verizon’s network.
As unlimited plans become the norm and price becomes, potentially, more rational, Verizon could easily start growing customers at a steady clip. The Q1 earnings report indicated that the company “extended its lead in the industry’s third-party network performance studies across the country.”
VZ Stock: One of The Street’s Best Yields
With a strong brand and multiple factors stacking the cards back in its favor, it’s not unreasonable to think Verizon will gain back this year’s losses and then some.
Sure, the company has posted two-straight earnings misses, but that’s already reflected in the price and is motivation for management to really buckle down and get things on track.
While at the moment there is minimal growth on tap long-term, that’s hardly surprising out of telecom stocks. It’s not like you’re paying for growth that isn’t there. Verizon’s forward P/E of just 12 is more than reasonable considering the dividend yield.
Plus, there’s always the chance that the internet of things — the fastest growing segment for VZ — will take up a growing share of the profit pie and add some earnings growth to the mix.
Add it up, and VZ stock is one of the best 5% yields on Wall Street. The recent selloff presents a perfect chance to get in on the action.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
