While AT&T Inc. (NYSE:T) has gone haring off after video content with its Time Warner Corp. (NYSE:TWX) acquisition, Verizon Communications Inc. (NYSE:VZ) seems to have stayed at home, hiring a telecom equipment executive as its next CEO. It will be interesting to see what he does for Verizon stock.
The trouble is, Verizon can’t afford to play the big media game. Its $130 billion acquisition of the Vodafone Group plc (ADR) (NASDAQ:VOD) interest in its wireless business, in 2014, left it saddled with debt. It still had $112 billion in long-term debt on its books at the end of March, against $264 billion in assets.
Instead, the company contented itself picking up the online leavings of America Online and Yahoo. The result was Oath, an online media company run by former AOL CEO Tim Armstrong, which is not material to the company’s results.
Why Buy Verizon?
If you’re interested in Verizon stock, it’s because you want dividend income. Verizon offers a big heaping helping of it, 59 cents per share each quarter, a yield of 4.8% at its June 14 opening price of about $47.50.
It takes a little more than $2.4 billion each quarter to pay that dividend to 4.13 billion shares. Verizon had $4.5 billion in net income during the March quarter, about $1.09 per share. For the June quarter, due to be reported July 24, analysts expect $1.15 per share in net income on revenue of $31.5 billion.
The dividend also looks safe when you look at cash flow. Verizon generated over $6.6 billion in operating cash flow during the March quarter. After paying interest on its debt and $4.5 billion in capital expenditures, it was still net cash positive, albeit barely, at $47 million. Of 31 analysts following the stock, 18 have it rated as a hold and 13 as a buy.
The Verizon Stock Story
The story for Verizon is 5G. The new CEO, Hans Vestberg, was formerly CEO of Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC), the Swedish equipment company, and joined Verizon as chief technology officer to oversee the 5G rollout in 2016. Officially, his first day as CEO is August 1.
Even Oath’s Armstrong, once one of the most talkative executives on the internet, admits that Verizon’s future is all about 5G and wireless service.
The bandwidth and coverage of 5G is expected to blur the lines between wired and wireless, and Verizon has assets on both sides.
It has been quietly installing fiber cable for wireless backhaul alongside Comcast Corporation (NASDAQ:CMCSA), testing Qualcomm Corporation (NASDAQ:QCOM) and Nokia Corporation (NYSE:NOK) equipment at its labs in Basking Ridge, NJ, and bragging about wireless speeds to 1.8 GBps and latency of 1.5 milliseconds, enough to deliver virtual reality.
The company says it plans to offer 5G over wires in California later this year and to deliver mobile versions of the service next year.
But 5G is going to be expensive to deliver. Regulators are planning yet-another spectrum auction for 5G, which could bring new competitors like Alphabet Inc. (NASDAQ:GOOGL), which sees 5G as the way to link its fiber to homes inexpensively, into the competitive picture.
Connecting devices to 5G could also mean much more intensive cloud use. Verizon recently committed to the Amazon.com Inc. (NASDAQ:AMZN) AWS cloud for that, abandoning efforts to go into that business on its own.
The Bottom Line on Verizon Stock
Verizon is claiming it will get big growth from 5G and make Oath a mobile ad leader with it, but you don’t buy Verizon stock on those promises. Again, you buy for the dividend and if something big happens, you win. If nothing big happens, you pocket the dividend.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN and T.