Verizon: Cash Is King
Summary
- Verizon's stock has disappointed so far in 2020, as it has underperformed the broader market by a wide margin.
- The company recently reported mixed Q1 2020 results, but I believe that Verizon is well-positioned to weather the current COVID-19 related storm.
- We are long Verizon, and we plan to add at current levels.
Verizon's (NYSE:VZ) stock performance has been subpar over the last few years, and it has pretty much been the same story so far in 2020. On a YTD basis, VZ shares have underperformed the S&P 500 (SPY) by approximately 3 percentage points.
Data by YCharts
Poor investor sentiment for the communications sector (and I should note for good reason) has wreaked serious havoc on Verizon's stock price, but I believe that this company is worthy of investment dollars at today's price.
The company's Q1 2020 operating results were not great by any means, but, in my opinion, investors should feel better knowing that the company is properly positioned from a cash flow perspective to easily weather the COVID-19 related uncertainty. Moreover, when compared to its closest competitor, AT&T (T), Verizon's cash flow metrics are something to write home about.
The Latest
On April 24, 2020, Verizon reported Q1 2020 results that beat the bottom-line estimates but that missed on the top-line. The company reported adjusted EPS of $1.26 (beat by $0.04) on revenue of $31.6B (missed by $770mm), which from an earnings perspective actually compares favorably to the year-ago quarter.
Source: Q1 2020 Earnings Slides
The highlights:
- Total revenue and adjusted EBITDA declined by 1.6% and 0.1%, respectively. Cash flow from operations was higher by 24% YoY (more on this below)
- Media sales declined by 4% YoY (to $1.7B) due to poor ad rates (largely a pandemic related headwind)
- The pandemic negatively impacted quarterly EPS by $0.04
- The company ended the quarter with $7B of cash on hand
As expected, the Media division had a rough start to 2020 as advertising took a significant hit as a direct result of the current pandemic. However, in a broader context, Verizon reported largely mixed results (strong earnings, a challenged top-line, and mixed operating metrics) but investors were mostly concerned about how COVID-19 was impacting/will impact the business.
To this point, the company's CEO, Hans Vestburg, was recently told reports that approximately 2.5% of Verizon's customers (or 800k people) have been unable to pay their bills. That doesn't seem like much yet, but, remember, it's still early. Additionally, management highlighted the fact that they were laser-focused on positioning the company to handle the tough operating environment. Financially speaking, Verizon already implemented several cost-cutting initiatives and added additional liquidity.
Source: Q1 2020 Earnings Slides
I believe that the company is properly positioned to deal with a further downturn if need be.
And finally, Verizon is one of the few companies that still plans to provide guidance (with the exception to the top-line) and, if you ask me, the guide proves that the company is well-positioned for the remainder of 2020:
Source: Q1 2020 Earnings Slides
**The Capex guidance was raised in March 2020 as management still anticipates to heavily invest in Verizon's infrastructure (mostly for 5G).
Any way you slice it, there is a lot to like about Verizon at current levels even after factoring in the headwinds. It also helps the bull case that Verizon's cash flow prospects are promising.
Cash Is King
Verizon is largely viewed as an income play and, rightfully so, as the defensive telecom has a safe and [slowly] growing above-average dividend. So, while some pundits are concerned about the company's rich dividend, I believe that Verizon has more than the capacity to continue to grow its payout through the next few years.
From a cash flow perspective, Verizon had a strong quarter as the company saw a material uptick in free cash flow.
Source: Q1 2020 Earnings Slides
As shown, the cash flow metrics were strong for the most recent quarter. Additionally, the metrics look even more impressive the deeper you dive.
| ($ - in billions) | Q1 2020 | Q1 2019 | % Chg |
| Cash flow from operations | $8.8 | $7.1 | 24% |
| Capital expenditures | $5.3 | $4.3 | 23% |
| Free cash flow | $3.5 | $2.8 | 25% |
| Less: Dividends paid | $2.5 | $2.5 | 0% |
| Free cash flow after dividends | $1.0 | $0.3 | 233% |
| Free cash flow dividend payout ratio | 71% | 89% | -20% |
Source: Q1 2020 Earnings Slides; Table created by author
There was some noise in the numbers (with one notable item being the voluntary pension contribution in Q1 2019 that did not happen in Q1 2020), but it is hard not to underscore just how impressive these figures are, especially given the backdrop. For comparison purposes, AT&T's FCF dividend payout ratio was approximately 96% at Q1 2020 (up from 63% at Q1 2019). So, it would be a meaningful understatement to say that Verizon is better positioned from a cash flow perspective than its closest competitor (but this is nothing new, right?).
Yes, the company intends to continue to invest capital in 5G, but I do not see any near-term concerns related to how Verizon is positioned. Verizon is well-positioned from a cash perspective to weather the COVID-19 related storm, of course, in my opinion. Moreover, the company can more than service its current debt load even if the market remains challenged through the next few quarters.
If cash is king, it's hard not to be bullish about Verizon, especially after considering the fact that the company has reported significantly better cash flow metrics than its closest peer. There is obviously more to the story than just cash flow metrics, but I believe that VZ shareholders should not be concerned about the calls that this large company will be "stretched" paying its dividend while also heavily investing in its key growth driver, 5G.
Valuation
Verizon's stock is attractively valued based on several of its own historical metrics.
Source: Morningstar
There are, obviously, risks to Verizon's story, especially in today's environment, but I believe that the uncertainty is more than baked into the current stock price. In my opinion, VZ shares are attractively valued under $60 per share.
Risks
Verizon's [growing] debt balance and its cash flow prospects are by far the two most significant risk factors to consider/monitor in 2020. If the cash flow metrics deteriorate over the next few quarters, I believe that Verizon's stock will face downward pressure, especially given the fact that the company plans to heavily invest in other areas (e.g., 5G rollout) over the next 18-24 months.
Bottom Line
If cash is king, Verizon should be crowned. The Q1 2020 results were largely a mixed bag, but let's remember that the company's key growth driver (i.e., 5G) still appears to be a catalyst that has the potential to create a tremendous amount of value in the years ahead. And while it won't move the needle anytime soon, I believe that the acquisition of BlueJeans Network - a company focused on videoconferencing and collaboration tools (i.e., a Zoom rival) - will turn out to be a long-term catalyst for the stock.
I believe that Verizon's stock will be a market-beater over the next 18-24 months, so investors with a time horizon longer than the next few quarters should treat any significant pullbacks, especially if they are caused by broader market concerns, as long-term buying opportunities. Remember, slow-and-steady usually wins the race.
Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.
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Disclosure: I am/we are long VZ, T. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.