Verizon Communications (NYSE:VZ)
Verizon Communications (NYSE:VZ) is still going in circles with very little growth to show for it. The market is dissatisfied with the wireless giant’s financial situation and challenges to the business model due to the company’s enormous debt burden and ongoing spectrum demands. Although the stock’s low price makes it a good buy from a value perspective, it has very little upside beyond the dividend.
Spinning Nonstop
While the market expected sales to remain stable at roughly $33.6 billion, Verizon reported a 1.9% decline in Q1’23. With the advent of 5G, it was anticipated that the cellular provider could recoup some of the money it had lost during the COVID downturn.
Most of the company’s 393K net new FWA customers joined the ranks of the company’s 437K net new broadband subscribers. Over the last year, the firm has added over a million new broadband subscribers, which could lead to significant growth.
Verizon, however, nonetheless reported an annual revenue drop. The consumer wireless sector saw a significant fall, contributing significantly to the 127K annual decline in postpaid phone net additions. The telecom giant also took a blow as prepaid net additions dropped by 351,000 due to the costs associated with retiring the 3G network.
The telecom corporation is stuck in a never-ending cycle of losing money as it spends billions on wireless network expansion projects like rolling out 5G speeds. Verizon’s quarterly revenue has been between $32 and $33 billion for years, with several quarters showing declining sales.
Consequently, Verizon announced Q1 EPS of $1.20, down from $1.35 a year earlier. In Q1 of 2019, before the effects of COVID kicked in, the wireless giant made $1.20.
The wireless giant has invested heavily over the last three years to adopt 5G services. Still, the final result has been mostly flat revenues and a decline in profitability. Since the anticipated growth engine, 5G, has failed to materialize, Verizon lacks any significant catalysts for the foreseeable future. Apple (AAPL) customers who want 5G agree to pay more for a new iPhone. Still, they won’t necessarily have to pay the cellular giant more to cover the cost of its yearly capital expenditures of more than $20 billion.
Financial Nightmare
The enormous debt burden, which reached $152.9 billion at the end of March, poses the greatest threat to stockholders. Verizon has a net debt of $150.7 billion and $2.2 billion in cash and short-term investments.
Verizon stock paid out more in dividends than it earned in Q1’23, even though it generated $8.3 billion in operating cash flow. The telecom giant paid out $2.7 billion in dividends during the quarter while spending $6.0 billion on capital expenditures. This left the business with just $2.3 billion in free cash flow.
Unsecured debt is just 2.7x adjusted EBITDA. Thus, the corporation has a healthy cushion against interest payments. The biggest danger here is that Verizon will see sales and cash flows fall in a competitive market, forcing the company to either reduce dividends or increase debt levels to pay dividends, as happened in the first quarter.
Verizon has forecasted a decrease in capital expenditures after the $1.75 billion spike in capex in Q1’23 due to the completion of C-Band related 5G investment. The business has revised its capital expenditures forecast for 2023 to $18.25 billion to $19.25 billion. Resulting in a reduction in expenditure to over $4 billion every quarter.
Verizon has always needed help in situations like this one when reduced expenditure is promised despite the fierce competition in the telecom industry. Although cash flow is expected to temporarily improve due to reduced expenditure on the network, the firm has yet to raise its revenues despite investing heavily in developing a competitive 5G infrastructure.
Although the stock’s dividend yield is 7%, it comes at a high price. Annual dividend payments of $10.8 billion reduce Verizon’s capacity to reduce its debt burden and strengthen the telecom giant’s financial footing ahead of the next spectrum auction or network investment phase.
Takeaway
The most important conclusion for investors is that Verizon is inexpensive at 8x EPS expectations. The main issues are the cellular juggernaut’s need for expansion and massive debt load.
In an ideal world, Verizon would trade at par with a 7% dividend. Suppose the company’s finances continue to deteriorate. In that case, it may be forced to reduce its dividend, which might hurt Verizon’s stock price. With $150 billion in outstanding debt, the stock needs to compensate investors more for the equity risk they are taking.
Featured Image: Unsplash @ leonbredella
