Verizon (NYSE:VZ) has had a tough time in 2018. While the S&P 500 has rallied over 5% year-to-date, VZ stock has dropped more than 3% on concerns related to greater wireless competition from a potential T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S) merger and going concerns related to the company’s wireline business.

But, VZ stock has reversed course recently. VZ stock is up nearly 3% over the past month and is out-performing the S&P 500. Moreover, the company just reported a double-beat-and-raise quarter which affirms recent strength in the stock.

Can VZ stock head higher? If so, how much higher?

I don’t see VZ stock as a big-time winner from here. But, I do think that this stable growth company can give investors a healthy 15% total return over the next three to four years, mostly thanks to improved wireless results.

Here’s a deeper look.

Verizon’s Quarter Illustrates Strong Wireless Fundamentals

Second-quarter numbers from Verizon were more of the same. The wireless business was really strong, with positive revenue growth and healthy margin expansion. Meanwhile, the wireline business was really weak, with negative revenue growth and margin erosion. Overall, this is leading to mild revenue growth on top of mild margin degradation.

But, the Q2 numbers also provide a glimpse of a brighter future for Verizon.

The wireline business is becoming increasingly less important. So far in 2018, wireline revenues and profits represent less than 25% and less than 1% of total revenues and operating profits, respectively. Meanwhile, the wireless business is becoming increasingly more important. With the wireline business operating near break-even, essentially all of the company’s operating profits are from wireless.

Going forward, it is unlikely that Verizon keeps the wireline business and runs it at a loss. Instead, the company will either continue to operate this business at break-even margins, improve the margin profile, or get rid of the business.

Thus, this year should mark a long-term bottom in operating margins for Verizon. The wireline business won’t get much worse, and the wireless business should get a whole lot better thanks to the forthcoming 5G rollout. 5G will allow Verizon to distinguish itself from peers and remove itself from ugly pricing wars which have hurt wireless margins over the past several years.

Therefore, the outlook going forward for Verizon as a wireless-first business is quite promising.

Verizon Stock Could Return 15% per Year From Here

I don’t think wireless growth will spark huge gains in VZ stock. But, I do think that at $50, VZ stock could return roughly 15% per year over the next four to five years.

The math is pretty simple. Verizon should be able to grow revenues around 2% per year as wireless becomes the entire driving force of the business. Also during that stretch, operating margins should start to improve again, and could gradually inch towards 25% and higher. Under those assumptions, I think it is reasonable to project $5.30 in earnings per share in five years for Verizon.

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historically-average 12.5x multiple on that implies a four-year forward price target of just over $66, which represent roughly 10% annualized returns from a $50 price tag at the end of this year.

Throw in a historically average 4.5% dividend yield, and you are looking at nearly 15% total annualized return over the next several years. That isn’t bad for a big moat, low volatility stock like Verizon with a ton a stability.

Bottom Line on VZ Stock

I’m not in love with VZ stock. But, the telecom giant is presently trading at a fair valuation, has healthy growth catalysts on the horizon, could see an inflection in its margin growth trajectory soon, and features a healthy 4.5% dividend yield.

Plus, the company is embedded into smartphone culture, so volatility in the stock has been and will continue to be greatly mitigated.

Overall, then, this is a solid, low volatility stock which offers attractive upside potential over the next several years.

As of this writing, Luke Lango was long VZ and TMUS. 

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