ii view: Verizon’s internet business is best since 2014

Full-year 2020 earnings estimates have been raised and the stock offers a dividend yield of over 4%. 

Third-quarter results

• Revenue down 4.1% to $31.5 billion (£24.3 billion)
• Adjusted earnings per share (EPS) flat at $1.25
• Previously announced quarterly dividend of $0.6275 per share

Chief executive Hans Vestberg said:

“We continue to demonstrate our strength and resilience by delivering very strong third quarter financial results. We are energized by the transformational technology that our 5G Ultra Wideband and 5G nationwide bring. Our purpose-driven culture paired with our network leadership will shape the future, for the better."

ii round-up:

US telecoms giant Verizon (NYSE:VZ) delivered forecast-beating quarterly earnings as demand for its internet services remained strong under ongoing work-from-home pandemic initiatives. 

Home internet connection adds of 139,000 proved the strongest since late 2014, boosted by pent-up demand as home installations returned following a lifting of some Covid restrictions. The balance of its store outlets, which had been forced to close, also reopened during the period. 

Adjusted earnings of $1.25 per share beat Wall Street expectations of nearer $1.20. Verizon shares are now down around 5% for the year-to-date compared with a fall nearer 10% earlier in 2020. Rival AT&T (NYSE:T), which was subject to speculative M&A talk in 2019, has seen its shares fall by over 25% during the year. 

Buoyed by more store openings and curbside product pick-up options, new post-paid phone subscribers of 283,000 surpassed analyst estimates of around 270,000. 

Sales for its media business, which includes Yahoo and AOL, fell by 7.4% year-over-year. A significant improvement on the near-25% fall in the severely hit pandemic second quarter as businesses made a tentative return to advertising. 

Given the improving trends, Verizon improved its full-year earnings guidance to growth of between 0% and 2% from a previous range of -2% to +2%. In September, the company announced a quarterly dividend of $0.6275 per share, an increase on the $0.6150 payment made over the previous four quarters. 

Earlier in the year, Verizon agreed to buy BlueJeans Network, a rival of Zoom Video Communications (NASDAQ:ZM), for less than $500 million.  

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. The building and rollout of its 5G network along with reducing debt occupy Verizon management more specifically. A ratio of net unsecured debt to adjusted profits of 2.1 times still stands just above its targeted range of 1.75 to 2 times.

Now, Covid-19 has added operational challenge to its competitive battle. Revenues fell by 4% year-over-year, potentially compounded by Apple's (NASDAQ:AAPL) decision to delay the release of its latest iPhone.    

For investors, network operators have arguably become commoditised. Price is now a key consumer consideration, and tie-ups with content providers add a further cost. But the reopening of its stores and increased use of communications and technology to function under pandemic restrictions offer positives. A historic and forward dividend yield of just over 4% (not guaranteed) is also highly attractive in a low interest rate environment. For now, defensive income qualities 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:

• Unsecured debt increased year-over-year by $4.7 billion to $105.5 billion
• A further surge in virus cases could see its stores closing again

The average rating of stock market analysts:

Strong hold