ii view: Verizon calls a good start to 2021

An expanding 5G network and a dividend yield of over 4%. Buy, sell or hold?

First-quarter results to 31 March

• Revenue up 4% to $32.9 billion (£23.7 billion)
• Adjusted earnings per share (EPS) up 4% to $1.31 (94p) 
• Previously announced quarterly dividend of $0.6275 per share (approximately 45p) unchanged from the previous two quarters

Chief executive Hans Vestberg said:

“Verizon is off to an excellent start in 2021 as we met the challenge of intense competition in the first quarter by achieving revenue growth across our three business segments. This year began with a transformative milestone for our company with our success in the recent C-Band spectrum auction. We continue to strengthen our networks, execute on our Network-as-a-Service strategy and focus on the five vectors that underpin our growth framework and position us to deliver success in 2021 and beyond.”

ii round-up:

US telecoms giant Verizon Communications (NYSE:VZ) delivered mixed outcomes in these latest first-quarter results. Mobile phone subscriber losses of 178,000 exceeded Wall Street forecasts for a decline nearer to 120,000, hindered by intense competition from AT&T (NYSE:T) and T-Mobile US (NASDAQ:TMUS) as operators all battle for new 5G subscribers.

But both revenue and earnings per share (EPS) marginally beat analyst estimates, coming in at $32.9 billion and $1.31, respectively. A previously declared quarterly dividend of $0.6275 per share is unchanged from the previous two quarters. 

Verizon shares fell by around 0.5% in early US trading, leaving them little changed year-to-date. Shares for rival T-Mobile US are down around 3% during 2021 while shares for AT&T are up by more than 4%. 

Earlier this year, Verizon and its two major rivals won bids totalling $78 billion under the US government’s auction of C-Band spectrum. The spectrum is considered to be the most likely source of available band wide to use for next generation 5G networks.

Nearly all of Verizon’s stores re-opened in March following earlier Covid-19 closures, generating positive phone net adds for the month and momentum going into the second quarter. 

All three of Verizon divisions – consumer, business and media – expanded sales over the period, including a second consecutive quarterly double-digit gain for its media business and owner of Yahoo. 

Since 2018, Verizon has been pursuing a target of $10 billion in cumulative cash savings by the end of 2021, a target it has now achieved. Previously detailed 2021 guidance for adjusted EPS to come in at between $5.00 and $5.15 was left unchanged.

ii view:

Verizon delivers communications, information and entertainment products and services to consumers and businesses. Its current goals include expanding its 5G leadership in the US. Intense competition provides the backdrop for the US telecoms sector. Verizon’s previous move to offer a free one-year subscription to Disney's (NYSE:DIS) streaming service competes with AT&T’s tie-up with HBO. 

For investors, network operators have arguably become commoditised, with price now a key consumer consideration. Tie-ups with content providers add a further cost, and increasing debt required to help expand its 5G network should also not be overlooked. 

However, a historic and estimated forward dividend yield of just over 4% remains highly attractive in an ultra-low interest rate world. The heightened usage of communications and technology to function under the pandemic could be carried forward as more workers look to operate from home. Investors must consider Verizon's defensive income qualities and potential 5G data growth continue versus intense competition and ongoing pandemic uncertainty.  

Positives

• Verizon is rolling out its 5G service 
• Attractive dividend (not guaranteed)

Negatives:

• Intense competition
• Unsecured debt rose year over year by $42.9 billion to $147.6 billion

The average rating of stock market analysts:

Strong hold