Title: Where's Verizon Communications Headed in the Next 5 Years?
Verizon Communications, symbolized by VZ and boasting a 0.05% dip, reigns supreme as the largest wireless carrier in the US, holding over 37% of the market. This telecom giant is not just a dominant force, but it's also a dividend dynamo, offering a staggering 6.2% yield, coupled with an impressive 18-year streak of yearly dividend increases.
If you're searching for steady passive income to sustain your living expenses or to amplify your investment portfolio, Verizon could be your ideal candidate. However, the competitive nature of the U.S. telecom industry, where a few titans dominate, necessitates constant investment in expansive infrastructure for wireless communications.
Let's delve into the prospects for Verizon over the next five years:
A Positive Subscriber Trend
Subscribers are the lifeblood of Verizon's business, with consumer wireless and wireline (Fios fiber optic services and landline phone connections) accounting for approximately 75% of the company's total revenue. Subscriber growth is pivotal in an environment steeped in price competition, where customer acquisition remains the key to growth.
Verizon's subscriber activity is characteristically cyclical. For instance, the holidays—Q4—usually witnesses robust consumer spending, plus the unveiling of the latest iPhone model in the fall. The subscriber losses have generally tapered since Q1, culminating in a positive quarter as of late.
Verizon completed its acquisition of TracFone, a prominent prepaid phone carrier, in late 2021, boasting 20 million users initially. Although Verizon has experienced prepaid customer losses subsequent to the acquisition closure, they've managed to stem those losses since Q3, indicating a steady return to growth.
Limited Growth Prospects Remain
Verizon harbors opportunities in fiber optics (Fios) and edge computing. As the number of devices connecting to networks skyrockets, the demand for faster data transmission surges. Verizon is gradually expanding its Fios services, as a result, ensuring higher bandwidth.
In a bid to enhance its fiber optics footprint, Verizon recently agreed to purchase Frontier Communications, the nation's leading fiber-only provider, for an impressive $20 billion. Post-acquisition, Verizon will be in possession of about 25 million fiber customers, with a 2028 target of 30 million and a long-term objective of between 35 million and 40 million subscribers.
While fiber optics present a promising avenue for growth, Verizon's mature consumer business—which account for 75% of its total revenue—may continue stifling the company's broader growth potential. Analysts have revised their long-term earnings growth estimates, projecting just a 2.4% annualized growth rate over the long term.
The Next Five Years
Given Verizon's probable slow growth, the stock may not meet the expectations of investors chasing maximum returns. However, the company's dividend appears robust. Currently, Verizon's dividend payout ratio stands at 59% of 2024 earnings estimates, leaving room for future increases. Verizon's dividend has grown an average of 2% annually over the last five years, a trend likely to continue.
Meanwhile, the stock currently trades at 9 to 10 times 2024 earnings estimates, possibly undervalued relative to the broader market, given the S&P 500's 23 times multiple. However, the stock may be overvalued given Verizon's slow growth, with a current PEG ratio of 3.1.
In conclusion, you can anticipate mid to high-single-digit annualized returns from Verizon over the next five years, a blend of 6% dividends and an additional 2% in earnings growth. Despite this, fluctuations in valuation could impact these returns, making Verizon an attractive option for retirees and other income-focused investors, but potentially a pass for others.
If you're looking for a company with a strong dividend history and potential for steady income, then investing in Verizon could be a consideration. Given its focus on expanding its fiber optics services and edge computing, Verizon aims to cater to the increasing demand for faster data transmission and improve its customer base.
