Investors keen on securing a reliable source of passive income often gravitate toward stocks with high dividend yields. The telecommunications sector, renowned for its generous dividend payouts, holds particular appeal, especially in light of modest growth projections for the industry. Taking a closer look at one of the telecom giants, not just in terms of its size but also its dividend yield, proves insightful. Following a recent dividend reduction by Walgreens Boots Alliance, this communication powerhouse now boasts the highest yield on the Dow Jones Industrial Average.

Meet Verizon

Emerging from the merger of Bell Atlantic and GTE Corp at the turn of the millennium, Verizon Communications (NYSE:VZ) stands as one of the largest global telecommunications companies. Offering a diverse range of services such as wireless, internet, and business solutions, the company operates through two primary segments: Verizon Consumer Group and Verizon Business Group. With an extensive 5G coverage already reaching 98% of the U.S., Verizon commands a substantial market cap of $159.34 billion.

Verizon’s strategic initiatives have been instrumental in securing its market dominance. Notably, its myPlan has provided customers with value, control, and simplicity, a crucial aspect amid inflation and reduced discretionary consumer spending. Furthermore, Verizon recently unveiled a new offering for myPlan customers, providing ad-supported tiers of Netflix and Max at $10 a month.

The company is actively investing in the C-band spectrum to expedite the development of its 5G services, concentrating on fixed wireless access and business wireless opportunities. Verizon aims to cover 250 million people with 5G service by the end of 2024, leveraging its entrenched position, extensive network coverage, and innovation capabilities to meet escalating connectivity demands.

Verizon Stock: Appealing Valuation With a 7% Yield

Despite a 7.7% decline in Verizon stock over the past year, trailing the broader market, its dividend yield now stands at an enticing 7.02%, surpassing that of rival AT&T. Notably, Verizon has increased its dividend for 19 consecutive years. With a manageable payout ratio of around 55% and robust free cash flow, the company appears well-positioned for future dividend hikes.

Moreover, Verizon’s current valuation is attractive. The stock’s forward price/earnings ratio is 8.08, its price/book is 1.61, and price/cash flow is 4.29. These valuation metrics represent a discount not only to communication sector averages but also to Verizon’s own five-year averages.

Verizon Boosts Free Cash Flow Forecast

Verizon’s Q3 2023 results exceeded Wall Street expectations, with operating revenues reaching $33.34 billion, slightly surpassing estimates. Despite a 2.6% YoY decline, EPS of $1.22 exceeded the consensus estimate of $1.18, continuing a trend of surpassing expectations for five consecutive quarters.

The quarter concluded with notable achievements, including 434,000 broadband net additions, marking a fourth consecutive quarter with 400,000+ additions. Additionally, Verizon reported 151,000 net additions, extending a trend of 125,000+ additions for the 9th consecutive quarter. Retail average revenue per user (ARPU) witnessed improvements on both prepaid and postpaid fronts.

Despite a debt of $122.2 billion, Verizon showcased its financial strength by repaying $2.6 billion in Q3. The company’s free cash flow exceeded consensus estimates by approximately $1.3 billion, leading to an upward revision of its full-year free cash flow forecast. Closing the quarter with a healthy cash balance of $4.2 billion reflects Verizon’s robust financial standing.

Analyst Expectations for Verizon

Analysts remain optimistic about Verizon, assigning it a consensus rating of “Moderate Buy” with a mean target price of $41.69. This suggests an 8.1% upside potential from current levels. Among the 19 analysts covering the stock, 6 have a “Strong Buy” rating, 3 recommend a “Moderate Buy,” and 10 suggest a “Hold.”

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