Will Verizon Stock Continue to Outperform?

Verizon stock - Will Verizon Stock Continue to Outperform?

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Since the beginning of October, Verizon Communications (NYSE:VZ) has been one of the best stocks in the market. I don’t mean that Verizon stock has risen the most of any stock or come close to that. Indeed, many names have outperformed VZ stock over the period.

But in context, the performance of Verizon stock has been truly impressive. VZ has risen almost 10% while the Dow Jones Industrial Average has fallen over 5%. Other large-cap stocks have been hammered across the board. Other wireless stocks have all declined, with T-Mobile (NASDAQ:TMUS) down 3%, and Sprint (NYSE:S) and AT&T (NYSE:T) off more than 7%.

A nearly 10% rise in six weeks for a mature, low-growth name like Verizon stock is impressive. Generating that rise against the grain of a weak market and a weak sector is close to extraordinary. A convincing Q3 earnings report late last month has been a driver for VZ stock. Since the Q3 results came in the wake of a Q2 report that I argued strengthened the case for VZ stock, the recent gains do make some sense.

Of course, investing is about looking forward, not backward. And there are some risks ahead as Verizon stock trades near a 19-year high. Whether VZ stock can hit an all-time high will depend on key decisions the company has to make in the coming quarters.

The Divergence Between Verizon Stock And AT&T Stock

A number of observers – notably The Wall Street Journal – have pointed to the recent divergence between Verizon and AT&T. The two companies have basically been mirror images of one another for a long time, and the price action of their stocks had reflected those similarities for many years.

In the past few years, however, the two companies have taken very different paths. AT&T has tried to build a consumer empire with acquisitions of DIRECTV and more recently media conglomerate Time Warner.

Verizon, in contrast, has stayed more in its lane. While VZ has dipped its toe into media, picking up The Huffington Post, AOL, and assets from Yahoo! (now Altaba (NASDAQ:AABA)), it spent a total of $10 billion on those deals, or about 4% of the market capitalization of Verizon stock. Conversely, AT&T spent $133 billion on its two major purchases.

At the moment, it’s pretty clear which path investors prefer. Verizon stock has risen an impressive 30% over the past year, while T stock has fallen by 10%. AT&T’s recent earnings have been viewed as disappointing (and rightly so), while investors have responded to Verizon’s earnings by bidding VZ stock higher. AT&T is bogged down by the largest corporate debt balance in the world, and Verizon has a world of options open to it.

The Media Decision

Verizon has interesting options in the media space. Verizon’s new Oath unit consists of its three digital acquisitions. But Oath had a weak Q3, as its revenue declined, Verizon withdrew a 2020 target of $10 billion in revenue for the unit, and Oath CEO Tim Armstrong left on Oct. 1.

On this site, Will Ashworth argued that Verizon should dump Oath, in order to become a pure-play telecom bet. I’m not quite that pessimistic, nor do I think Oath is quite material enough to VZ stock to get excited about. But the unit’s struggles do raise the question about whether Verizon needs to acquire another content provider.

After all, both Comcast (NASDAQ:CMCSA) and AT&T have decided that the only way to compete for advertising dollars with Alphabet (NASDAQ:GOOGL) and Facebook (NASDAQ:FB) is to combine distribution and content. Verizon largely has stayed out of the fray, and its management has said it plans to continue to focus on its core business.

By owning Verizon stock at these levels, investors are asserting that VZ can survive going forward without buying another content provider. The price action of VZ stock over the last year shows that most investors believe that to be true. Comcast and AT&T disagree. If those two companies are right, their stocks will outperform Verizon stock in the years to come.

5G And Capital

But if Verizon continues its current strategy, it will keep throwing off impressive free cash flow. However, since VZ will probably launch 5G services in 2019, its capital expenditures likely will stay high due to increased spending on developing its network and adding more spectrum. But Verizon already has cut its capex forecast for this year, due to increased efficiencies, and it should be able to keep its spending down going forward as well.

That, too, opens up some options. Verizon has brought down its leverage ratio in 2018. As a result, it can buy back more VZ stock, and its dividend – which still yields over 4% – can be raised. With VZ stock still cheap, and with the company still taking market share from AT&T and Sprint, Verizon’s free cash flow bolsters the bull case. The owners of Verizon stock should continue to see solid returns, the company’s balance sheet is in good shape, and 5G is a potential positive catalyst for Verizon stock over the next few years.

Right now, investors are buying the bullish case on VZ stock and largely selling the debt-fueled strategies of Comcast and AT&T. (CMCSA stock has rallied of late, but it’s still been basically flat since the beginning of 2017.) And I can see why. But for those purchases of VZ stock to be profitable over the long-term, Verizon’s strategy has to be correct (assuming that it sticks to its current strategy).

As of this writing, Vince Martin has no positions in any securities mentioned.

 


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