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A Dow component since 2004, Verizon operates in two primary business lines. Its wireless division covers wireless voice, data and equipment, while its wireline segment includes hardline voice, data and broadband services as well as network and cloud computing services.
Its current share price of $45 is roughly 20% off its 52-week high, but its current dividend yield of just over 5% represents an intriguing possibility for income-focused investors.
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Verizon’s wireless segment accounted for more than two-thirds of the company’s 2016 revenue of $126 billion. That number is down more than 4% compared to the prior year. EBITDA of nearly $45 billion and adjusted earnings per share of $3.87 are also down versus 2016. The combination of decreased overage charges, postpaid customer losses and increased promotional costs are largely to blame.
Verizon’s struggles come amid increased competition from rivals such as Sprint Liquid error: internal and T-Mobile Liquid error: internal. For the first time in the company’s history, Verizon lost more than 300,000 wireless customers in the first quarter of 2017. New unlimited data plans offered by these smaller competitors appear largely to blame. During the same quarter, AT&T reported a net 191,000 subscriber loss, while T-Mobile posted a gain of 914,000 customers. Verizon subsequently rolled out its own unlimited data plan and reported a net gain of over 100,000 subscribers since the launch, stemming some of the recent losses. Nevertheless, at around 146 million total customers, Verizon remains the largest wireless provider in the country.
Verizon’s stock price is down 14% thus far in 2017 making it the worst-performing Dow stock year-to-date. The stock trades at around 12 times its 2017 earnings estimates, much lower than the 18 multiple of the broader S&P 500. That P/E ratio is comparable to AT&T but lower than those of faster-growing rivals T-Mobile and Sprint.
Verizon pays an annualized dividend of $2.31 per share putting its dividend yield at just above 5%. The company has been steadily growing its dividend for the past 10 years, making it a popular choice among income seekers. The stock’s recent payout ratio of just over 60% is reasonable for a mature company, although recent weakness in revenues and volatility in cash flows puts the strength of the dividend in question. For instance, in 2016, operating cash flows dropped by more than 40%, while free cash flow plummeted by nearly 75%. Nevertheless, the dividend has grown about 4.3% annually over the past 10 years. Earlier this year, Verizon also announced a stock repurchase plan of up to 100 million shares to be completed no later than 2020.
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Despite current competitive pressures, Verizon remains a leader in the telecom sector and, as such, enjoys several advantages in the industry.
Click here to read about how Verizon is becoming more than just a boring wireless company.
With the smartphone market nearing a point of saturation and recent revenues declining, Verizon is focusing on a few areas to drive future growth.
While Verizon is a leader within the telecom space, there are a number of headwinds the company must deal with in order to stay in front.
Verizon stock is popular among dividend investors for its 5% yield, but it’s not a company without its share of issues. The company’s growth is slowing, it’s being impacted by increased competition and its plan to grow future revenues are as of yet unproven. Verizon is a solid telecom play, but investors should be well aware of some short-term hurdles the company is facing before committing.