There’s good news and bad news when it comes to Verizon Communications (NYSE:VZ) stock.
At the moment, investors mostly are focused on the good news that’s affecting VZ stock. Verizon stock touched an all-time high in November, though it has fallen about 7% amid stock-market declines since that point.
And there’s a lot to like about Verizon stock. Verizon continues to post strong subscriber numbers. I highlighted the company’s blowout Q2 report in July as a catalyst for VZ stock, which did indeed rally nicely in the wake of the results.
The primary concern is Verizon’s sector. I’ve called its industry a “circular firing squad,” because the four major carriers continue to cut prices and/or offer more benefits in an effort to poach subscribers from one another. Verizon famously had to start offering unlimited-data plans, after insisting for years that it never would offer such a plan.
Even with VZ stock at $57, however, it has enough positive catalysts to offset those worries. And given Verizon’s dividend yield of 4%+, a strong case can definitely be made that VZ remains a solid pick for income investors, in particular.
Subscriber Growth Drives Verizon Stock
Verizon stock is only up about 7% over the past year, which doesn’t sound all that impressive. But the S&P 500 is down about 7% over that same period, and VZ’s rival, AT&T (NYSE:T), has seen its share price fall almost 18% during that time. Moreover, VZ stock is up 20%+ from its March lows.
It has been a strong run for Verizon stock, and there’s a simple reason for its strength. Specifically, the company’s subscriber numbers have been strong. Verizon remains the largest wireless carrier in the U.S. That has made the company an obvious competitive target of not only AT&T, but T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S).
T-Mobile has led the industry in terms of subscriber growth. That’s one reason why TMUS stock had surged tremendously before stalling out over the past two years. Sprint has shown occasional signs of life in net adds as well, and both companies seemed to be taking at least some of their new subscribers from Verizon.
After reporting strong numbers for three straight quarters, Verizon has shown that it’s holding its own. Churn remains well under 1%, and VZ clearly is outperforming second-place AT&T.
And so, at least for now, the market-share risk to Verizon stock looks minimized. And that’s been a big reason why VZ has been able to rally over the past ten months.
The Outlook of VZ Stock
Of course, stocks are valued based on companies’ expected future performance, not their past numbers. On that front, there’s good news for owners of Verizon stock as well.
Notably, 5G is on the way. Admittedly, 5G may not be the profit driver that some expect. Verizon’s capital spending will have to rise ahead of the shift (although Verizon has lowered its 2018 capital expenditure guidance), owing to better-than-expected efficiency. Some of the potential incremental profits no doubt will evaporate due to competition, as the “race to the bottom” in the space continues in one form or another.
That competition may become lighter, however. The merger between Sprint and T-Mobile appears likely to pass regulatory muster. That would shrink the industry to a “big three” from a “big four.” (US Cellular (NYSE:USM) has had a huge run of late, but it remains a small fish in a big pond.) The deal should also lessen pricing pressure, potentially boosting Verizon’s profit margins.
Meanwhile, Verizon still has a number of options. AT&T has the largest debt load in the world. T-Mobile and Sprint likely will be focusing on obtaining approval for their merger and then integrating for several years. Verizon, however, has a clean balance sheet and the ability to either make an acquisition of its own or look to boost the returns of the owners of Verizon stock.
So far, it appears that VZ is planning to focus on the wireless space rather than follow the AT&T path of adding content. And given the struggles of Verizon’s content division, Verizon Media (formerly known as Oath), that may be the wisest path. But if an opportunity presents itself, Verizon can capitalize. At this point, none of its rivals can say the same.
The Valuation of VZ Stock
All told, the outlook of Verizon stock remains upbeat. And it has an enticing dividend and an attractive valuation as well. VZ stock yields a healthy 4.2% and trades at a little over 12 times analysts’ 2019 consensus earnings-per-share estimate.
VZ does trade at a notable premium to T stock, which now is valued at just 8.5 times the consensus 2019 EPS estimate. But Verizon doesn’t have close to the same debt load as AT&T. Unlike AT&T, it didn’t pick up a media business facing continuous pressure from cord-cutting. And it’s obvious that Verizon’s wireless business is performing much better than that of AT&T at the moment.
Even given the lower current yield of Verizon stock, I’d rather own the better business with the better balance sheet. Right now, that’s clearly VZ.
As of this writing, Vince Martin has no positions in any securities mentioned.