ii view: Verizon dividend yield still attractive

Covid has hurt and network competition is intense, but 5G is being rolled out. Buy, sell or hold?

Fourth-quarter results to 31 December

• Revenue down 0.2% to $34.7 billion (£25.3 billion)
• Adjusted earnings per share (EPS) up 7% to $1.19 (87p) 
• Previously announced quarterly dividend of $0.6275 per share (46p)

Guidance:

• Expects adjusted full-year EPS of between $5.00 to $5.15

Chief executive Hans Vestberg said:

“Verizon finished the fourth quarter with strong financial performance. 2020 was marked by transformational change, including the launch of our 5G nationwide network. We witnessed a mass shift toward virtual collaboration, touchless retail and delivery, remote work, distance learning, and telemedicine. We continued to execute our multi-use network strategy. We continue to be the partner of choice for the world’s most innovative brands. Today, we are excited to lead technological advances beyond mobile devices and create new opportunities for growth across multiple industries."

ii round-up:

US telecoms giant Verizon (NYSE:VZ) delivered mixed outcomes in these latest fourth-quarter results. Both revenue and earnings per share (EPS) marginally beat analyst estimates, coming in at $34.7 billion and $1.19, respectively. 

But post-paid phone subscribers of 279,000 for the quarter fell short of Wall Street hopes, hindered by strong competition from AT&T (NYSE:T) and T-Mobile US (NASDAQ:TMUS) as operators battle for new 5G subscribers. 

Verizon shares fell by more than 2% in pre-market US trading, leaving them down by around 5% over the last year. Rival AT&T, which was subject to speculative takeover talk in 2019, has seen its shares fall by almost 25% over the last year. Shares for T-Mobile US are up around 60%. 

Verizon management estimate the net impact from the virus was a 2% gain during this latest end of year quarter, but a 21% headwind for the full year. Covid restrictions had earlier in the year kept many of its store outlets closed, crimping revenues and device sales. 

Full-year 2020 EPS of $4.30 compared to the $4.65 outcome in 2019. Accompanying 2021 guidance pointed to adjusted EPS of between $5.00 and $5.15. Since 2018, Verizon has been pursuing a target of $10 billion in cumulative cash savings by the end of 2021, with $9.5 billion achieved to date. 

Free cash flow of $23.6 billion for 2020 represented a near one-third increase compared to 2019. In December, Verizon declared a quarterly dividend of $0.6275 per share, unchanged from the prior period. 

ii view:

Intense competition provides the backdrop for the US telecoms sector. Verizon’s prior move to offer a free one-year subscription to Disney's (NYSE:DIS) streaming service competes with AT&T’s tie-up with HBO. Now the pandemic has added operational challenge to its competitive battle. Full-year 2020 operating revenue fell by nearly 3% to $128.3 billion compared to 2019, with wireless service growth offset by declines in wire or fixed line products. 

For investors, network operators have arguably become commoditised. Price is now a key consumer consideration. Tie-ups with content providers add a further cost and layer of consideration. But the heightened usage of communications and technology to function under the pandemic could be carried forward as more workers look to operate from home. A historic and forward dividend yield of just over 4% (not guaranteed) also remains highly attractive in an ultra-low interest rate world. For now, defensive income qualities and potential 5G growth continue to outweigh ongoing pandemic uncertainty.  

Positives

• Verizon is rolling out its 5G service 
• Pursuing a target of $10 billion in cumulative cash savings by 2021

Negatives:

• Intense competition
• Unsecured debt rose year over year by $19.3 billion to $118.5 billion

The average rating of stock market analysts:

Strong hold