Ending 2017 on Strong Margin Gains, Verizon Looks Forward to a Positive 2018

  • Dividend Investments
  • 15 Days ago
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No other telecommunications conglomerate has ever seen such ups and downs in their stock prices like Verizon Communications Inc. (NYSE: VZ). For the past five years, Verizon stock has been plying between $40 and $55. During mid-2015 to the beginning of 2016, the stock went into a cup-and-handle phase with intermittent downtrend thereafter.

Source: Google Finance

However, things are set to change in 2018. Wells Fargo has upgraded Verizon stock from ‘market perform’ to ‘outperform’. Investors have their eyes on the following developments that would change the way Verizon stock has been behaving:

  1. Free Cash Flow:

In its Q4 2017 earnings release, Verizon announced that the expected free cash flow due to the Republican tax reform will be around $3.5bn to $4bn. This free cash will lead to an increase of 55 to 65 cents per share. After a difficult 2017, the benefits due to tax reform would be invested in acquisitions, growth plans and dividends- all of which is reassuring the shareholders of a positive 2018.

  1. 5G Mobile Network:

Verizon is investing heavily in its 5G mobile network. It plans to roll out its 5G fixed wireless network in five cities by the end of 2018 (starting with Sacramento, CA in the second half of 2018) and is also eyeing on investing around $17bn in investments. Samsung would provide the routers and radio frequency planning services. To improve its fiber assets ahead of the roll-out, Verizon spent $4.9bn on buying out Straight Path and XO Communications.

Financial Performance

The following financial metrics gives a clear idea of its performance:

  • Q4 2017 Revenue:$33.96bn ($32.3bn in Q4 2016)
  • 2017 Year-end Revenue:$126bn ($126bn in 2016)
  • Q4 2017 Earnings Per Share:$0.86 ($0.86 in Q4 2016)
  • 2017 Operating Earnings Per Share: $3.74 ($3.87 in 2016)
  • Q4 2017 Cash Flow: $8.1bn ($5.8bn in 2016)
  • 2017 Year-end Cash Flow: $25.21bn ($22.72bn in 2016)

Source: Yahoo Finance

Key Takeaways:

  • Q4 2017 revenue has been higher than the analyst estimates of $33.26bn
  • Internet of Things revenue increased by 17%
  • Excluding the divestures and acquisitions, full-year revenues declined by 2%
  • $9.5bn was paid in cash dividends to the shareholders, which was 2.3% higher than last year

Comparing it with another Telecom giant AT&T Inc, Verizon has seen higher net income and a superior gross margin. Both the companies have higher debt loads, however, given that Verizon has lower net debt; it has good chances of seeing its stock price rise in 2018.

Dividend History & Performance

Dividend History

Dividend Yield: 4.85%

Payout Ratio: 51.9%

Dividend Growth: 12 Years

Annualized Payout: $2.36

Being a dominant wireless provider, Verizon’s cash flow has been powering its dividend payout. It has increased its dividend continuously for the past 12 years and its current yield is 4.85%. The current dividend is $0.59 which was paid on 1st February 2018. The big boost for the dividend was the impact of the one-time tax reform on the EPS, which was 129% higher than last year. With the one-time tax benefit of $16.8bn, the company can safely afford two years worth of dividend at an annual rate of $2.36.  For investors, the combination of increased free cash flow, higher ad revenue and the 5G roll-out would mean that the investors can have a safe bet on the company’s dividend growth.

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