ii view: income play Verizon's new cost-cutting plan

Shares in this telecoms giant have fallen by more than a quarter year-to-date and offer a forecast dividend yield of over 6.5%. Buy, sell, or hold?

Third-quarter results to 30 September

• Revenue up 4% to $34.2 billion (£30.4 billion)
• Adjusted Earnings Per Share (EPS) down 7% to $1.32 (£1.17) 
• Quarterly dividend of 65.25 US cents per share (58p) up 2% from the previous quarter
• Unsecured debt down $1.1 billion from the previous quarter to $131.4 billion (£117 billion)

Chief executive Hans Vestberg said:

"We took a number of actions in the third quarter that helped drive improved operational and financial performance, but we know there's still more work to be done. The pricing actions we took earlier this year, as well as our new cost savings program, show that we are being deliberate and strategic in our decisions to strengthen our business. At the same time, we are focused on executing our 5G strategy.”

ii round-up:

US telecoms giant Verizon Communications Inc (NYSE:VZ) has announced a new cost saving programme as it reported earnings and revenues which beat Wall Street forecasts. 

Sales for the quarter to the end of September rose 4% to $34.2 billion (£30.4 billion), pushed by its consumer wireless business. Adjusted earnings fell 7% year-over-year to $1.32 per share, with the Dow Jones constituent company also detailing a new $2 billion to $3 billion cost savings program in to 2025. 

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Verizon shares retreated by more than 4% US market trading having come into this latest news down by more than quarter year-to-date. Shares for rival AT&T Inc (NYSE:T)have fallen by a similar amount during 2022, while shares for T-Mobile US Inc (NASDAQ:TMUS) are up by around 17% year-to-date, aided by cost savings following its 2020 takeover of Sprint. 

Sales for Verizon’s consumer focused business gained nearly 11% year-over-year to $25.8 billion, helped by its takeover of network provider TracFone. Net losses of 189,000 post-paid phone customers proved worse than Wall Street forecasts, hit by previous price increases. That follows losses of 507,000 of such subscribers during the first half.

Revenues for its business-related division rose by almost 2% year-over-year to $7.8 billion, helped by a fifth consecutive quarter of more than 150,000 post-paid net phone additions.

In early September, Verizon declared a quarterly dividend of 65.25 US cents per share, up from the prior quarter’s 64 cents per share and payable to eligible shareholders on 1 November. 

ii view:

Formerly Bell Atlantic, Verizon today employs over 115,000 people. Its current goals include expanding its 5G leadership in the US and maintaining a healthy balance sheet. Intense competition provides the backdrop for the US telecoms sector. Verizon’s promotion to offer a six-month subscription to Disney's (NYSE:DIS) streaming service competes with T Mobiles tie-up with Netflix Inc (NASDAQ:NFLX). 

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For investors, a further loss of consumer wireless customers generates some caution. 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's time.

On the upside, management initiatives to improve efficiency including its new cost saving program continue. A forecast price/earnings (PE) ratio below the three-year average suggests the shares are not expensive, while the pandemic has arguably added to the need for fast data from more locations. 

On balance, and while cost pressured consumers and businesses offer caution, a forecast dividend yield of over 6.5% is hard to ignore.

Positives

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

Negatives:

• Intense competition
• Unsecured debt of $131.4 billion

The average rating of stock market analysts:

Hold