ii view: Verizon’s 2023 profit prediction disappoints

Shares in this telecoms giant have fallen by around a quarter over the last year and now offer a forecast dividend yield of over 6%. Buy, sell, or hold?

Fourth-quarter results to 31 December

• Revenue up 3.5 to $35.3 billion (£28.6 billion)
• Adjusted Earnings Per Share (EPS) down 11% to $1.19 (£0.96) 
• Quarterly dividend of 65.25 US cents per share (52p), unchanged from Q3
• Unsecured debt down $0.8 billion from the previous quarter to $130.6 billion (£106 billion)

Chief Executive Hans Vestberg said:

"We delivered on the operational expectations and financial targets that we set in the second half of 2022. Wireless mobility and nationwide broadband will be two of the most significant contributors to our growth for the next several years."

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ii round-up:

US telecoms giant Verizon Communications Inc (NYSE:VZ) today detailed fourth-quarter results which broadly matched Wall Street forecasts, but full-year 2023 earnings guidance was less than analyst had hoped for. 

Total revenue rose 3.5% to $35.3 billion in Q4, aided by price increases, while earnings per share fell 11% to $1.19 year-over-year because of costs linked to 5G investments. Management guided for 2023 adjusted earnings of between $4.55 and $4.85 versus analyst forecasts for $5 per share, weighed down by debt interest costs. It was also less than the $5.18 Verizon made in 2022. 

Verizon shares fell in early US trading having come into this latest update down by around a quarter over the last year. Rival AT&T Inc (NYSE:T) is down by a similar amount, while T-Mobile US Inc (NASDAQ:TMUS) is up by around a third as it strips costs following the 2020 takeover of rival Sprint. 

There was a return to post-paid, or monthly payment, wireless subscriber additions at Verizon’s consumer business. An addition of 41,000 followed net losses for the three previous quarters, with almost three-fifths of its post-paid customer base now using 5G capable devices.  Consumers with compatible phones can now enjoy download speeds 10 times faster than before. 

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Verizon expects capital spending through 2023 to range between $18.25 and $19.25 billion, including a final payment of $1.75 billion to the US government for airwave spectrum purchased in 2021. 

In January, the company declared a quarterly dividend of 65.25 US cents per share, unchanged from the previous quarter and payable to eligible shareholders on 1 February. 

Broker Morgan Stanley retained its ‘overweight’ stance on the shares following the results, flagging an estimated $44 per share price target. 

ii view:

Formerly Bell Atlantic, Verizon is headquartered in New York and employs over 115,000 people. Providing voice, data, and video services, it operates through the two divisions of Consumer and Business, with the former accounting for just over three-quarters of overall sales. Group goals include expanding its 5G business in the US and maintaining a healthy balance sheet.  

For investors, caution regarding the earnings outlook is not to be ignored. A highly uncertain economic outlook, including a cost-of-living crisis,  could see spending on communications either cut or reduced, while generating a return on its major 5G investments continues to occupy management.

More favourably, group initiatives to improve efficiency, including a previously announced $2-$3 billion cost savings program out to 2025, continue. The pandemic has arguably added to the need for fast data from more locations, while a forecast price/earnings (PE) ratio at around 8 times using the mid-point of management’s 2023 EPS estimate still leaves it below the three-year average, suggesting the shares are not obviously expensive. 

For now, and while some caution remains sensible, a dividend yield of over 6% will likely continue to attract income investors. 

Positives

• Expanding its 5G service 
• Attractive dividend (not guaranteed)

Negatives:

• Intense competition
• Unsecured debt of $130.6 billion

The average rating of stock market analysts:

Hold