After Earnings, Is Verizon Stock a Buy, a Sell, or Fairly Valued?

Verizon Communications VZ released its first-quarter earnings report on April 22. Here’s Morningstar’s take on Verizon’s earnings and the outlook for its stock.

Key Morningstar Metrics for Verizon Communications

• Fair Value Estimate: $54.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Narrow
• Fair Value Uncertainty: Medium
• Forward Dividend Yield: 6.74%

What We Thought of Verizon Communications’ Q1 Earnings

• Verizon is making good on its promise to show improvement in its core residential wireless business, with net customer losses slowing versus the prior year. The firm typically loses net customers in the first quarter, reflecting slow industry activity at the start of the year and a somewhat odd seasonal pattern in Verizon customer contracts. The firm still expects to add residential postpaid phone customers during the year, even adjusting for its recent “add a phone number to your phone” promotion. Regardless, Verizon will probably continue to lose some market share this year.
• Revenue per customer increased nicely year over year, and Verizon has yet to get the full benefit of the price increases it implemented in March. With T-Mobile TMUS also announcing last week that it will take some “price adjustments” in the upcoming quarters, the level of competition in the US wireless industry remains highly rational.
• Cash flow was weak during the quarter, but this was primarily the result of seasonal timing. Management reiterated guidance for the year, which calls for stable cash flow and accelerating debt reduction as the year progresses.
• We think Verizon shares are attractive. As with AT&T T, we don’t believe investors fully appreciate the stability the US wireless industry will deliver over the next few years, and we think the roughly 7% dividend yields on both stocks are too high.

Fair Value Estimate for Verizon Stock

Our fair value estimate of $54 per share is roughly 8.1 times our 2024 EBITDA forecast. Our valuation also implies an 8.2% free cash flow yield based on Verizon’s performance in 2023. Higher cash taxes and interest costs will likely offset business growth and lower capital spending in 2024, leaving free cash flow roughly flat for the year.

We expect Verizon will gradually lose postpaid wireless market share as it prioritizes pricing stability rather than growth. Smaller rivals T-Mobile and AT&T have similar network resources and should be able to attract roughly the same number of customers each quarter as Verizon. This parity should naturally cause the firms’ market shares to converge slowly. With a rational competitive environment allowing for stable service pricing and increasingly modest phone credits, we expect revenue per postpaid customer will grow steadily in the coming years.

Read more about Verizon’s fair value estimate.

Economic Moat Rating

Verizon’s narrow moat stems from cost advantages in its wireless business and the industry’s efficient scale characteristics. The firm has organized its business along customer lines, but we believe it is best understood along wireless and fixed-line dimensions. The wireless business produces about 70% of service revenue but contributes nearly all of Verizon’s profits. We estimate wireless returns on invested capital were about 16% before 2021. With heavy investment to acquire additional spectrum in the C-band auction and subsequent spending to put that spectrum to use, we estimate wireless returns on capital have declined to the low-double digits, still leaving Verizon ahead of its cost of capital.

Verizon, AT&T, and T-Mobile dominate the US wireless market, claiming over 90% of retail postpaid phone customers. Solid nationwide coverage requires heavy fixed investments in wireless spectrum and network infrastructure. While a larger customer base does require incremental investment in network capacity, a significant portion of costs are either fixed or more efficiently absorbed as network utilization reaches optimal levels in more locations.

Read more about Verizon’s economic moat.

Financial Strength

Verizon paid dividends totaling $11 billion in 2023, equal to about 60% of free cash flow. Management expects net leverage to begin declining in 2024 as it uses excess cash to reduce net debt. We still don’t expect the firm to hit the high end of its leverage target until 2026 or 2027, depending on how much secured debt it issues.

Read more about Verizon’s financial strength.

Risk and Uncertainty

Our Medium Uncertainty Rating reflects the volatility we think Verizon investors face relative to our global coverage. Verizon primarily sees regulatory and technological uncertainties. Wireless and broadband services are often considered necessary for social inclusion in employment and education. If Verizon’s services are deemed insufficient or overpriced, especially in response to weak competition, regulators or politicians could intervene.

Recent media reports have highlighted potential risks related to lead-sheathed cables commonly deployed in telecom networks into the 1960s. The liabilities and costs associated with removing these cables, if deemed necessary, are unknown today.

Read more about Verizon’s risk and uncertainty.

VZ Bulls Say

• A focus on network strength over the past 15 years has put Verizon in an enviable position. Its wireless network provides the broadest coverage in the industry, and its reputation with customers is sterling.
• With the largest customer base in the US, Verizon Wireless is the most efficient carrier in the industry, delivering far better profitability than its rivals.
• Verizon is relentlessly pushing forward in its core business, expanding its fiber optic network and deploying 5G wireless technology.

VZ Bears Say

• Wireless technology is dramatically lowering the cost to build and maintain a network. Rival carriers have rapidly deployed new spectrum and technology to add coverage and capacity. Verizon’s network leadership is a thing of the past.
• Verizon’s fixed-line business is a disaster, earning minimal profits and facing years of high costs necessary to support these declining businesses.
• Verizon’s balance sheet isn’t the fortress it once was. Paying down debt will limit strategic flexibility and shareholder returns. Liabilities tied to lead-sheathed cable could add another headache.

This article was compiled by Tom Lauricella.