While Verizon Communications Inc. (VZ, Financial) recently hit a 52-week high, the stock has not done much over the past decade. However, the wireless giant's fortunes look like they are startning to turn.
Company profile
Verizon provides wireless and wireline services and products in the U.S. On the wireless side, the company provides both post-paid and pre-paid plans that offer voice, data and texting. It also sells third-party smartphones and other wireless-enable devices such as tablets and smartwatches.
On the wireline front, the company provides internet services and related equipment through its Fios high-speed internet solution, as well as video and voice services, cloud storage and device protection. It also provides various voice, video conferencing, internet of things, network security and internet services to businesses.
In addition, Verizon offers wholesale services to other communication service companies and mobile virtual network operators that sell the services under their own brands.
Valuation
Verizon currently trades at about 7.20 times 2024 Ebitda estimates of $48.70 billion. Based on the current 2025 Ebitda consensus of $49.50 billion, the stock trades at a 7.10 multiple.
Revenue is projected to grow 1.40% in 2024 and 1.10% in 2025.
The company currently has a free cash flow yield of about 11.50% based on FCF of $20 billion projected for 2024.
Progress being made
Over the past decade, Verizon has been plagued by modest revenue growth. Revenue has only risen about 5% from $127.10 billion in 2014 to $134 billion in 2023. The loss of wireline and pre-paid customers have hurt it in this regard.
At the same time, the company has also had to spend a lot on capital expenditures to continually upgrade its wireless network, most recently for 5G. It also went out and spent $45 billion to acquire C-Band spectrum at auction in late 2020, early 2021. All in all, it has invested a lot of money for very little return.
That has left the company with $148.60 billion in net debt at the end of the third quarter. Leverage stood at 3.10 times on its $47.80 billion in 2023 adjusted Ebitda.
However, the fourth quarter saw a bit of a shift for Verizon. It added 449,000 net wireless postpaid customer additions and 413,000 net broadband customer additions. This helped its Consumer Service revenue rise 2.60% for the quarter and for the company to forecast 2% to 3.50% wireless service growth for 2024. Now other parts of the business weighed on the overall quarter, such as business and wholesale revenue, but it was a step in the right direction for its core Consumer Service business.
Part of the company's success with its Consumer Service business has been the introduction of its myPlan service, which allows users to choose from various unlimited wireless plan options, and then add various perks, such as discounted streaming bundles, Apple One and Walmart+ memberships. Verizon already has 13.1 million myPlan subscribers since it launched the service in May.
The company is also seeing its investment in C-Band starting to pay off. This is helping in two ways. First, its capital intensity is going down. Capital expenditures were $23.10 billion in 2022, $18.80 billion in 2023 and is projected to be below $17.50 billion in 2024. Lower capex leads to stronger free cash flow, which the company can use to reduce its debt.
Given its modest growth, debt reduction can be one of the bigger drivers for Verizon's stock. Adjusted Ebitda growth is only expected to rise 1% to 3% in 2024, so shrinking debt to reduce its enterprise value is one way to see the stock price increase without growing Ebitda or multiple expansion. Basically, at the same enterprise value/Ebitda multiple, equity value would replace the shrinking debt, lifting the stock price.
At the same time, Verizon said that where it has C-Band, it is seeing lower churn, higher customer adds and more premium services being consumed. The company said 80% of its gross consumer fixed wireless adds came from C-Band markets.
During the fourth-quarter earnings call, Chief Financial Officer Anthony Skiadas said:
“We continue to see better performance in markets where we have deployed C-Band. In our first 76 C-Band markets, fourth quarter Consumer postpaid phone gross add growth was 8 percentage points better than in non-C-Band markets. Additionally, Consumer postpaid phone churn and C-Band markets was 4 basis points better than in non-C-Band markets. The strong momentum in the quarter, combined with the continued deployment of our C-Band network positions us well in 2024. The quality of the business we are writing in Consumer remains high as myPlan continues to drive premium plan adoption. The premium take rate in C-Band markets for the quarter was more than 10 percentage points higher than in non-C-Band markets. Consumer ARPA (average revenue per account) of $134.10 represents an increase of 4.7% year-over-year. This was driven by new customer additions, premium plan adoption and fixed wireless subscriber growth. We expect continued and healthy organic ARPA growth in 2024.”
When it comes to risks, mergers and acquisitions are one. Verizon does not have a very good track record of late when it comes to acquisitions. Its acquisition of TracFone in 2021 has not panned out, while earlier acquisitions of AOL and Yahoo were complete flops. The company hopefully will not be tempted into another one.
Prepaid also continues to be a drag with high churn. Meanwhile, with corporate layoffs, business revenue has also been a source of weakness.
Competition is also a risk, as the three main wireless companies continue to battle it out. Wireless is a mature market, so retention and churn remain important factors for the industry. Right now, Verizon is starting to win the battle, but AT&T (T, Financial) and T-Mobile (TMUS, Financial) will fight back.
Conclusion
After a tough decade, Verizon is starting to show some signs of life. Its C-Band bet is beginning to take off at a time when its capital intensity is starting to go down. This is helping it gain customers and increase premium services at the same time. This in turn should help lead to strong free cash flow generation and debt reduction.
The stock should have upside from here as the company deleverages, while it also pays a nice dividend that is good for about a 6.40% yield. The company has grown its dividend for 19 straight years, so with improving prospects and debt reduction, it should be a solid option for dividend growth investors.
