This year so far, financial traders have loved technology stocks but didn’t like Verizon Communications (NYSE:VZ) stock very much.
However, there’s a value-investing opportunity here. As we’ll see, Verizon’s dividend yield is hard to beat and the company’s shares are trading at a tempting price point.
Verizon is a telecommunications giant that’s helping to build out the world’s 5G network infrastructure. I suspect that investors have abandoned Verizon in 2023 because they’re rotating into hyper-growth tech stocks.
When they rotate back into “steady Eddie” stocks, Verizon’s market capitalization could expand quickly. However, there’s a negative news item that has recently caused consternation in the telecom sector. So, let’s dive headfirst into that topic now.
Why Some Investors Are Worried About VZ Stock
In July, The Wall Street Journal published an article suggesting that AT&T (NYSE:T), Verizon and “other telecom giants have left behind a sprawling network of cables covered in toxic lead that stretches across the U.S.”
Surely, it’s not a mere coincidence that VZ stock dropped from $37 to $31 and change soon after the WSJ story was released.
In the heat of the moment, it’s tempting to think that a scandalous news item will absolutely ruin a company. But then, consider the time in 2010 when a BP (NYSE:BP) drilling rig spilled vast quantities of oil into the Gulf of Mexico.
That was much more notorious than the Verizon toxic-lead news scandal – which, to be perfectly honest, most people probably haven’t even heard about. BP is still around and making plenty of money 13 years after the oil spill.
If this news item has caused Verizon’s valuation to shrink, that’s really just an opportunity for enterprising investors. It’s not every day that you’ll come across a gigantic company like Verizon, with a trailing 12-month price-to-earnings (P/E) ratio as low as 6.69x.
Is Verizon’s Massive Dividend Safe?
Citi analyst Michael Rollins is well aware of the lead contamination story, but he upgraded VZ stock from “neutral” to “buy.” He also raised his price target on the stock from $39 to $40.
Evidently, Rollins isn’t too worried about Verizon and AT&T cutting their dividends. “Better forward free cash flow should. . . help reduce net debt leverage and support dividend payouts,” he assured.
Concerning Verizon in particular, I never suspected that the company’s capital position was in jeopardy this year. Verizon ended the first half of 2023 with free cash flow of $8 billion. This marks a notable improvement compared to $7.2 billion in free cash flow a year earlier.
Verizon has a sound track record of quarterly EPS beats. Income-focused investors should also be glad to hear that Verizon is celebrating its 17th consecutive year of dividend increases.
All of this leads me to believe that Verizon’s 7.72% forward annual dividend yield is fairly safe. With that, I tend to concur with InvestorPlace contributor Omor Ibne Ehsan’s assessment that VZ stock is an excellent “cash cow stock” for recession-resilient dividends.
VZ Stock: Hold Shares, Reinvest Dividends
The toxic lead cable news story is quite unfortunate. However, Verizon is in a solid enough capital position to withstand it.
Just remember, one scandal wasn’t enough to sink BP. Similarly, a single news item won’t spell the end of Verizon.
Now, Verizon’s valuation is quite reasonable and the company’s dividend payouts are probably safe.
I’d consider VZ stock under $35 to be a major bargain. For serious income investors, consider holding Verizon shares and reinvesting the dividends at every opportunity.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
