Verizon: Don't Let Quarterly Noise Distract You

Summary

• Disappointing guidance for 2022 resulted in Verizon's worst day since the pandemic market crash of 2020.
• Competitive pressures resulting in lower EPS and revenue growth and fear of rising interest rates and inflation were in the spotlight during the day.
• The long-term investment thesis, however, remains intact and Verizon continues to solidify its leadership in the space.

Cindy Ord/Getty Images Entertainment

Strong competitive advantages, sustainable high return on capital and long-term shareholder value creation do not depend on meeting/beating quarterly estimates or slight revisits in the annual EPS and revenue growth numbers.

This is exactly what's currently happening at Verizon (NYSE:NYSE:VZ), which in spite of the disappointing quarterly results is a perfect example of how a boring low-growth businesses could deliver superior returns.

The downbeat annual guidance and increased competitive pressures in consumer wireless resulted on more than 5% daily decline for the carrier.

While churn was steady, the competitive dynamics within the industry resulted in wireless retail postpaid phone net losses of 292,000, due to a decline in gross additions of 2 percent from prior year.

Source: Q1 2022 Earnings Release

Although lower than expected short-term expectations should normally result in such a daily reaction, they do not impact my long-term investment thesis in the company. Verizon remains very conservatively priced with highly attractive dividend yield and one of the best-positioned, both strategically and operationally, telecommunication companies.

VZ Is Conservatively Priced

The negative sentiment towards Verizon and the telecoms sector more broadly has resulted in the company now trading at one of its highest dividend yields over the past decade.

Data by YCharts

At the same time, the dividend payout ratio has improved significantly over the past few years even as Verizon continues to reinvest heavily into its business and raise its annual dividend payments.

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We generated strong cash flows to support our investments and financial commitment, and we delivered our 15th consecutive year of increased dividend payments while maintaining a healthy balance sheet.

Source: Verizon Q4 2021 Earnings Transcript

As a result, relative to the broader market, Verizon has become extremely attractive, offering nearly 3.5% higher dividend yield when compared to the S&P 500.

prepared by the author, using data from annual reports and multpl.com

As a company with long track record of rising dividend payments that also operates in a stable industry, such an attractive yield is usually associated with operational difficulties or a business in secular decline.

However, Verizon continues to perform strongly both in wireless and broadband, with the latter registering one of its best quarterly results.

Verizon Q1 2022 Earnings Presentation

Verizon Q1 2022 Earnings Presentation

The company also is valued as one of the leading global telecom carriers and in-line with its current EBITDA margin.

prepared by the author, using data from Seeking Alpha

Last but not least, VZ continues to be among the heaviest spenders on C-Band spectrum and coverage and while the 2022 outlook is now expected to come at the lower end, investors should not forget that the company actually exceeded expectations during the past year.

Verizon 2022 Investor Day Presentaiton

Operational Strength

If we adjust Verizon's return on equity for the 2014 buyout of Vodafone's (VOD) stake, the company is earning one of its highest ever returns on common equity.

Data by YCharts

This is primarily driven by Verizon's high net income margin, which also is at one of its highest levels ever and thus offsets the negative impact of the declining leverage in recent years.

prepared by the author, using data from annual reports

* Leverage = Total Assets / Total Equity

As the U.S. largest telecom carrier which benefits from its strong brand and leading network, Verizon also has the highest gross margin within the telecoms peers set.

prepared by the author, using data from Seeking Alpha

These industry leading operational metrics have also allowed the company to significantly outspend its arch enemy - AT&T (T), which struggled in recent years due to ill-thought capital allocation decisions.

prepared by the author, using data from annual reports

Even though Verizon spends significant amount on capital expenditure and wireless licenses, the company still trades at a forward free cash flow yield of 7.7%. The capital intensity will likely reach peak levels during this year and will then face a slow decline as the need for 5G and other network investments cools off.

Verizon Investor Day 2022 Presentation

Back in December, I showed why VZ is in a much better position than AT&T to drive customer loyalty and higher ARPU in the wireless space. Verizon's higher margins and more consistent capital allocation allowed the company to outspend its peers in both Capex and C-Band spectrum licenses during 2021.

This trend continued during the first quarter of 2022, when VZ spend roughly £7.7bn on both capex and licenses.

Verizon Q1 2022 Financial Statements

While AT&T is catching up with its spectrum acquisitions during the first quarter of this year, it will likely need to significantly increase its capital expenditure during the year in order to ramp fiber deployment and 5G mid-band spectrum deployment.

AT&T Q1 2022 Financial and Operational Schedules

Having said all that, however, we also should recognize that higher spend is not all it takes in the telecommunications space. Verizon remains as the world's most valuable telecom brand and as such drives significant customer loyalty. Moreover, as I highlighted a few months ago, Verizon also has a significant first-mover advantage to provide mobile edge competing for many of U.S.-based enterprises. And following the AWS deal, the company has recently announced yet another major deal, this time with Meta (FB).

Verizon Investor Day 2022

Verizon Investor Day 2022

Conclusion

There's a strong long-term investment thesis behind Verizon's current leading position in the U.S. telecommunications space. The company enjoys the higher margins within its peer set which were accurately deployed in its core business, as opposed to chasing large media transactions. Additionally, Verizon has a major first-mover advantage in the cloud space which offers significant long-term potential. All that comes at a very conservative valuation and a dividend yield of close to 5%.

Disclosure: I/we have a beneficial long position in the shares of VZ either through stock ownership, options, or other derivatives. 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.