Verizon Communications (NYSE:VZ) stock remains a cheap income investment as the economy and 5G era open. Retirees seeking income can buy it for a nearly 63 cent/share dividend yielding 4.35%.
VZ stock will open today at about $57. That’s a market cap of almost $239 billion and a price-to-earnings ratio of just 13.4.
Analysts don’t expect much change when Verizon reports first-quarter earnings April 21, though it might even go down further.
The consensus earnings estimate is for earnings of $1.29/share on revenue of $32.45 billion, but the “whisper number” analysts are giving their best customers is lower, $1.26/share.
Does this mean younger investors should move on? Maybe not. That’s because there’s another Verizon under the surface. This Verizon is taking big risks in hopes of becoming a growth company again. If you want to speculate on that story, now is the time to buy in.
A Closer Look at VZ Stock
Verizon was the big winner at the recent 5G spectrum auction, representing $45.5 billion of the $81 billion raised. Along with the cost of build-out, the network created by this new spectrum is expected to cost Verizon $60 billion.
In the near term, this will mean further strain on Verizon’s cash flow and balance sheet. Operating cash flow was $41.7 billion in 2020 and the company’s capital expenditures exceeded $20 billion.
There was already $141 billion of debt, before the auction announcement. The dividend also costs a little over $10 billion/year to service.
Verizon is betting it can make 5G pay through deals with Cloud Czars Microsoft (NASDAQ:MSFT) and Amazon.com (NASDAQ:AMZN) to support its faster data rates and automate factories, warehouses and deliveries with robots and drones.
It’s running a test with United Parcel Service (NYSE:UPS) on drone parcel deliveries in The Villages, the giant Florida retirement community. It’s also entering the telehealth market, through a company called BlueJeans it bought last year.
In the consumer space, Verizon is working to cut costs so it can increase profits.
Pandemic-inspired ideas like “touchless retail” will become permanent and some of its store workers will be let go. Older consumer services like its 3G service will be shut down.
Verizon and Oath
Verizon is also trying to fix the Yahoo and AOL operations it bought in the last decade, through advertising innovation. Yahoo cost almost $5 billion after it paid $4.4 billion for AOL, including that company’s ad network, in 2015.
After combining the two companies and renaming them Oath, it wrote off $4.6 billion on them in 2018. (Ooof.)
What was Oath is now Verizon Media. Verizon’s growth plan is to create advertising services without cookies that still let clients maintain personal connections, a technology it calls ConnectID. ConnectID is being positioned as an alternative to Alphabet’s (NASDAQ:GOOGL) Federated Learning of Cohorts (FLoC), which is already getting pushback from rival browsers which call it a privacy disaster.
If Verizon can get its ad ideas accepted, it could get its investment in Yahoo and AOL back down the road. It could spin Verizon Media off or sell it to someone who wants to be in that business. This wouldn’t make a huge dent in its debt, but it would certainly help, and it would make Verizon a pure play on 5G bits.
The Bottom Line
By going all-in on 5G Verizon is transforming its investment case.
If you believe that investing in 5G now can bring huge returns later, this might be a good time for you to speculate on Verizon stock. You’ll still get that dividend and, if management can execute, you’ll see growth down the road.
At the time of publication, Dana Blankenhorn directly owned shares in MSFT and AMZN.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.
