There’s a lot of good stuff happening at Verizon (NYSE:VZ) and all of the positive developments revolve around 5G. However, if Verizon stock is to keep rising in value, it’s got to get rid of Oath, its subsidiary that includes all of its digital content providers.
Verizon stock would be a much easier sell if VZ became a pure-play bet on telecom. Here’s why.
First Out of the Gate
My InvestorPlace colleague, James Brumley, recently did a good job highlighting the benefits of Verizon being first out of the gate with in-home 5G.
“While Verizon’s early launch of its 5G machine will eventually be undone and replaced by tech based on a different standard, the fact that it was first to the market with a commercial product means it gets to help shape more than its fair share of future standards,” Brumley wrote in an article published on Oct. 5. “Versions, standards and suffixes aside though, given this week’s launch it’s simply too difficult to say Verizon isn’t better positioned than any other player to capitalize on the advent of a 5G market.”
Simply put, VZ is positioned to be a big beneficiary of the global 5G market, which is worth an estimated $250 billion. Along with the 4.26% dividend yield of Verizon stock, that’s a great selling feature for the shares, since 5G will certainly greatly boost the company’s profits starting in 2020.
Oath’s Colossal Failure
Back in February, I argued that Oath, not 5G, would enable VZ stock to rise by double-digit percentage digits this year. By taking ad revenue from Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOGL), Verizon would show non-income investors that it was poised to grow meaningfully, I wrote.
But in retrospect, that was a big ask from a division that represented less than 10% of Verizon’s overall revenue. Now we know that Oath’s been a colossal failure; it has no chance of becoming a meaningful part of Verizon’s business.
On Sept. 12, Verizon announced that Tim Armstrong, Oath’s chief executive, was leaving the company by the end of the year, with Oath COO Guru Gowrappan taking over as the head of the media unit.
Armstrong had promised that Oath would generate $10 billion of annual revenue by 2020. That’s clearly not going to happen. In Q3, Oath’s revenues declined 7% year-over-year to $1.8 billion. Moreover, Oath is not expected to generate any growth in upcoming quarters.
If Oath is not taking market share, I’m not sure what the point of owning it is. Get rid of it and make Verizon stock a pure play on telecom.
Here in Canada, where I’m based, Telus (NYSE:TU) is our pure-play telecom bet. It’s got a nice dividend yield of 4.62%, meaningfully higher than the dividend yield of Verizon stock.
“Telus we like even more [than BCE] because it’s a pure play and it has one of the best CEOs in Canada in Darren Entwistle,” Stephen Takacsy, CEO of Lester Asset Management, told BNN Bloomberg in late September. “We own Telus as well as [BCE] but we have a bigger position in Telus. They’ve gone the pure play route and haven’t diversified into media.”
Without Oath acting as a noose around Verizon’s neck, not to mention distracting the company’s management, Verizon stock could really accelerate heading into what looks to be an exciting 2019 for the telecom industry.
The Key to Verizon Stock Is Its Dividend
At the end of the day, however, the attractiveness of VZ stock is largely due to its high dividend yield.
In the first nine months of fiscal 2018, VZ paid out $7.3 billion in dividends or 51% of its free cash flow. There’s no doubt that VZ can keep increasing its dividend at a healthy clip.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
