Verizon Communications (NYSE:VZ) reported better-than-expected Q1 2019 earnings on April 23, and increased its full-year EPS guidance. Verizon’s earnings came at $1.22 per share on $5.16 billion in net income. Over the past week, Verizon stock has been choppy, leaving investors wondering what may be next for the telecoms giant.
Verizon, the top wireless company in the U.S., offers robust long-term growth potential. However, Verizon is likely to trade within a narrow price range in the coming weeks.
Therefore, potential Verizon shareholders may regard the respectable dividend yield, as opposed to a potential stock price increase, as the basis of their investment thesis for now. Verizon’s dividend is one of the most important reasons why I believe the shares belong in a capital-growth portfolio.
High Flying Dividends
Income investors know that they can compound their returns through reinvesting dividends from high-yielding shares. There are four main reasons why dividend investors love investing in Verizon shares.
Robust Dividend Yield: Verizon’s current dividend yield is 4.2%. In other words, the trailing dividend income per annum is $2.41. On May 1, Verizon paid a quarterly common stock dividend of 60.25 cents per share; the next dividend announcement is expected in June. Not all stocks that pay high dividends are quality dividend plays; therefore it would be prudent to look at several other metrics before investing in VZ stock.
Increasing Dividends: Over the past 12 years, Verizon has continually increased dividends. Although a company’s stock price can go up or down over time, the dividend of a good company usually only goes up. This fact, for example, can be important for retirees who supplement their retirement income with dividends. Such a high dividend yield gives VZ investors a strong income stream that exceeds what bonds can offer. Therefore Verizon stock is likely to stay as a a long-time favorite of dividend growth investors.
Verizon is a Cash Cow: Experienced dividend investors pay close attention to a company’s free cash flow as dividends are ultimately paid out of cash. Verizon is a large, stable business that generates a a lot of cash.
Within the past 12 months, Verizon’s free cash flow per share has been $4.3 — an amount more than enough to cover the dividend. As the telecommunications industry has strong barriers to entry, Verizon’s dominance in the U.S. is likely to continue and investors can regard this cash flow as quite safe.
Payout Ratio: The payout ratio can show investors if a stock is paying out either less or more than the company earns. In other words, if a company earns $1 per share but pays a dividend of $1.40, management may have to cut out the dividend at some point in the near future. A payout ratio of over 100% means that a company is paying out more in dividends than it earns. Verizon’s payout ratio is 51.7 which makes the VZ stock’s dividend sustainable in the long run.
The 5G Revolution and Verizon Stock
Creating growth opportunities in a mature industry like telecommunication services requires proactive management. And that’s where one of Verizon’s strengths may lie. The upcoming 5G revolution should be a strong catalyst for the company’s share price in the long-run and management certainly regards the 5G rollout strategy as the top priority area.
The benefits of 5G (“fifth generation mobile networks) will include much faster download speeds, more data capacity — a must for the Internet of Things (IoT) devices — and very little lag in mobile applications, which should have a positive impact on the development of online gaming as well as self-driving cars.
Verizon CEO Hans Vestberg has recently said: “2018 was a remarkable year full of 5G firsts, including being first in the world to commercially deploy 5G with our 5G Home product.”
The past few weeks saw Verizon launch 5G wireless in Chicago and Minneapolis. The number of cities is expected to reach 30 by the end of the year.
The group is also working with Samsung Electronics (OTCMKTS:SSNLF) to launch 5G-enabled smartphones in the coming months. Leadership in the 5G rollout will enable Verizon to gain new subscribers — an income stream to provide momentum to the stock price.
However, on the 5G front where Verizon is aiming to be the leader in the U.S., VZ’s organic earnings growth will not possibly materialize until 2020 or even 2021 — after the full mobile 5G launch in late 2020.
The Bottom Line on Verizon Stock
Verizon has a strong story and the company has a clean balance sheet with robust cash flows. Thus, it remains a long-term growth play on a fundamental basis.
In 2018, Verizon generated revenue of over $130 billion and as a wireless carrier, it had over 150 million U.S. residents, who showed “strong loyalty” toward the company. Therefore, the long-term positive trend in VZ stock is likely to continue in future years, too.
However, in the near-term, I do not expect Verizon’s price to increase substantially.
Verizon has gone up 16% over the past 12 months. On May 9, 2018, it saw a 52-week low of $46.09. If you are an investor who also pays attention to technical charts, from a price and time cycle analysis, I’d expect Verizon stock to reach an immediate high for the year on May 9, 2019, around $60 and then stay range-bound for several months, between $55-$60.
In other words, long-term investors may regard any potential dip towards the low $50’s as a viable entry point to start enjoying the dividends this solid company offers.
With mid to late-2020 onwards, Verizon stock price is also likely to reward investors, as high-end customers willingly pay up for speedier smartphone connections as a result of the 5G rollout nationwide.
Meanwhile, if you are an experienced investor in the options market, you may also consider using a covered call strategy with a time horizon of approximately half a year. In that case, you may, for example, buy 100 shares of VZ at a limit price of $57.15 (the closing price on April 30) and, at the same time, sell a VZ Oct. 18 $60 call option, which currently trades at $1.2.
The call option would stop trading on Oct. 18, 2019, and expire on Oct. 19.
This covered call would offer both downside protection in case of volatility and a decline in Verizon stock and also give investors the possibility to generate further income. Those investors who are comfortable with the rationale that covered calls create profits from three sources (i.e., capital gains, option premium, and dividends) may consider employing such a covered call strategy.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.