For most of this year, shares of US mobile network giant Verizon Communications (VZ:NYSE) have acted as a valuable hedge against volatility, trundling along slowly but steadily when wider US markets were bouncing around like a rubber ball.
This is not surprising for a business with such predictable revenue and cash flow lines, thanks to millions of customers on annual subscriptions. The stock’s beta – a measure of how volatile it is versus the wider market – underscores the point, where its 0.38 rating, according to Stockopedia, effectively means Verizon shares move around almost two-thirds less than the S&P 500.
The flipside to that is, while many stock valuations have raced ahead over the past couple of months, pushing the S&P 500 to new records, Verizon has failed to keep pace. Investors can buy Verizon shares today for roughly the same price as in early March 2025 and about 25% below the levels of five years ago.
HIGHLY RELIABLE
Verizon might be past the best of its growth years, and while it’s unlikely to be a highly-rated stock in future, it should remain a highly reliable one, offering something investors don’t want to ignore - a high dividend yield and a path to steady returns.
Between a near-6.5% dividend and a modest rebound in earnings, the stock could deliver solid double-digit annual returns without needing to go above and beyond current low expectations.
Verizon’s earnings have declined in recent years due to weak performance in its wireline business, rising competition in wireless, and heavy spending on 5G infrastructure which pressured margins and increased debt. Sales have been pretty much flat in the past few years, but EPS fell substantially with margin compression.
Crucially, that earnings pinch may be coming to an end. Analysts expect Verizon’s earnings to grow over the next three years as the company expands its broadband and fibre footprint, drives higher wireless service revenue through premium plans and improves operational efficiency to grow margins.
This earnings growth is likely to be driven by a combination of a few things: network advantage, subscription-based revenues and the defensive nature of the business.
For example, Verizon has consistently invested in its network infrastructure, positioning it well for the ongoing 5G rollout and future connectivity demands, 6G and beyond.
This is important because it helps cap churn, or the number of customers who switch away to a rival service provider. For many, reliable coverage trumps cost, which should allow the company to raise prices beyond inflation, bolstering margins and driving profits, cash, and dividend growth.
Verizon’s second quarter churn was 1.56%, lower than the 1.64% in the previous quarter and below full year 2024’s 1.59%. Churn in 2023 was 1.63%.
Getting that figure lower still will be among the firm’s challenges moving forward, which makes price locks and broadband bundles something worth watching.
IS VERIZON’S DIVIDEND SAFE?
If the dividend is such a crucial part of the investment case, how safe is it? Two things provide reassurance. First, Verizon hasn’t reset its shareholder payout since 2006, when it held its $1.62 annual payment flat, and data from the company shows it hasn’t lowered the dividend this century.
Second, Verizon has a long track record of generating free cash flow above the cost of dividends, barring the pandemic-hit years of 2021 and 2022. Free cash flow cover of dividends recovered to 117% in 2023 and 168% in 2024. Dividends are forecast to grow about 2% this year and next year.
Veizon shares are currently trading on a rolling 12-month PE (price to earnings) of nine times, according to Stockopedia data. We believe that looks too wide a discount for a near-6.5% income yield, and where even modest earnings growth should further bolster total returns.
A last thing for UK investors to consider is US withholding tax. This is what overseas investors must pay on US stock dividends, and is set at 15% if held in an ISA, although there is an exemption if investors use a SIPP to invest.
Even so, it would still imply an annual income yield of more than 5.5%. That, coupled with a PE of 10, could imply a share price north of $50, and with some analysts calculating a fair value at $55, means 25% to 30% upside from current levels.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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