I've recently increased my investment in Verizon and am considering further purchases of this high-yielding dividend stock for 2025.
I've been gradually investing in Verizon (VZ 1.15%) shares for a while now. The main allure for me is its substantial dividend, currently offering a yield of over 7%. That's significantly higher than the typical 1.2% yield of the S&P 500.
Beyond the enticing income stream, I also see potential for value growth due to Verizon's fairly priced stock. This attractive combination of income and value is why I've recently added more to my telecom stock portfolio and plan to buy more this year.
A Low-Risk, High-Yield Money Maker
High-yield dividend stocks often come with higher risk profiles, sporting high payout ratios, questionable growth prospects, and shaky balance sheets. However, Verizon manages to buck this trend, boasting a sturdy financial foundation.
During the first nine months of the previous year, Verizon generated $26.5 billion in cash flow from operations, down slightly from the prior year's $28.8 billion. Despite this dip, the company comfortably covered its capital expenditures ($12 billion) and had $14.5 billion left over to fund its dividend outlay ($8.2 billion) and strengthen its balance sheet.
Verizon's financial health is further reflected in its low leverage ratio of 2.5, and its investment-grade bond ratings of A-/BBB+/Baa1. The company aims to further fortify its finances by aiming for an even lower leverage target in the 1.75 to 2.0 range.
Unshackling Potential Growth
Verizon is harnessing its financial strength to drive growth by acquiring Frontier Communications in a $20 billion all-cash deal. This acquisition will extend its fiber network to reach 25 million premises. The deal is expected to be immediately accretive to Verizon's earnings and generate at least $500 million in annual cost synergies.
Though the deal will initially boost Verizon's leverage ratio, the company plans to swiftly reduce its debt once the synergies start flowing in. Verizon expects to achieve its long-term leverage target by 2027, at which point it may launch a share repurchase program to supplement its high-yield dividend.
The strategic Frontier deal isn't Verizon's only growth avenue. The company is also reaping the benefits of its substantial investments in broadband and 5G networks, which are expected to continue. In Q3, Verizon hit its subscriber target 15 months ahead of schedule and reported double-digit percent growth in total broadband connections. These developments set Verizon on course to resume profitable growth.
Verizon's ability to maintain its dividend growth streak (18 consecutive hikes, the longest in the US telecom sector) is of particular note, especially considering the relative stagnation in dividend hikes seen at competitors like AT&T.
The Bottom Line
Despite the challenges it's faced in recent years, Verizon's robust financial health and growth strategies make it an appealing investment proposition. Its stock's current undervaluation and the promise of future dividend hikes make it an intriguing option for investors seeking a balanced income and growth play. I see myself continuing to invest in Verizon and potentially ramping up my position if the stock price remains within striking distance.
Additional Insights:
In the first quarter of 2024, Verizon's Q4 revenue grew by 1.6% to $35.7 billion, slightly surpassing analyst expectations. The company added 426,000 wireless subscribers, marking its strongest quarter in five years. Underlying cash profit (EBITDA) increased by 2.1%, though slightly below forecasts.
Verizon's dividend payments for 2024 climbed from $11.0 billion to $11.2 billion, demonstrating a steady and growing dividend payment rate. The shares offer a 7.0% forward dividend yield, which is well-covered by cash flows despite a slight weakening of cash flow projections.
Free cash flow for the full year reached $19.8 billion in 2024, an increase of 6.0%, thanks to a decrease in investment expenditure. Verizon ended the quarter with net debt excluding lease liabilities of $139.8 billion but is actively working to reduce its debt levels.
Verizon's growth strategies include aggressive investment in 5G and fiber broadband services, aiming to grab market share with increased 5G adoption. The company expects to reach nearly 700,000 new Fios fiber broadband customers in 2025, potentially increasing annual passings to over 1 million after the Frontier Communications acquisition.
Analysts estimate a potential upside of over 27% for Verizon within a year, seeing the stock as undervalued with a 25% discount to its fair value. Verizon expects underlying cash profits to grow in the 2.0-3.5% range in 2025, driven by continued growth in wireless service revenues and the expansion of its fiber broadband services.
Given Verizon's strong financial performance and dividend growth, I'm considering allocating additional funds towards this investment in my finance portfolio. The company's attractive money-making potential, coupled with its low leverage ratio and investment-grade bond ratings, makes it a compelling option for income and growth-focused investors.