Should one consider purchasing Verizon's shares at the present moment?
Should one consider purchasing Verizon's shares at the present moment?
The shares of telecom giant Verizon (VZ -0.10%) have been on an upward trend. Over the past 12 months, the stock has climbed around 14%, as of this writing. While an increasing share price is always welcome, the stock's main attraction as an investment might lie in its income-generating potential.
Verizon's dividend serves as a stable source of passive income, thanks to its 18 consecutive years of increases. Moreover, it boasts a commendable forward-dividend yield of 6.5% by Nov. 7.
Given this appealing aspect, buying and holding Verizon stock might be a wise move. However, there's a potential concern to consider. In September, Verizon announced its intentions to acquire Frontier Communications Parent. Here's an analysis of how this Frontier acquisition could impact your decision to buy Verizon shares.
Verizon's advantages from the Frontier acquisition
Verizon wants to acquire Frontier as part of its strategy to expand its presence in the growing fiber-optic internet market. Demand for high-speed internet, driven by data-heavy activities like video calls and streaming media, is on the rise.
The Frontier deal would boost Verizon's fiber network coverage. Frontier offers fiber-optic internet service in 25 states, which would expand Verizon's fiber service area to 31 states.
In terms of revenue, Frontier generated $1.5 billion in the third quarter, a 4% increase year over year, thanks to increasing demand for its fiber service. Verizon's Fios-branded fiber service, on the other hand, saw Q3 sales of $3.2 billion, which was nearly flat compared to the previous year.
Upon completion of the Frontier acquisition, expected in 18 months, Verizon's Fios revenue will see a boost from Frontier's contribution. The acquisition makes sense for enhancing Verizon's broadband business, but it also presents some challenges.
Challenges with Verizon's deal for Frontier
The Frontier acquisition will be a $20 billion all-cash deal. According to reports, Verizon may borrow to finance the deal. As of Q3, Verizon already carries $126.4 billion in unsecured debt.
Additionally, Frontier has accumulated its own debt of over $11 billion. Frontier has warned that its "significant amount of indebtedness" and future debt could negatively impact its operations.
Furthermore, Verizon will have to invest more to expand its fiber network. Frontier aims to reach 10 million homes by 2026, up from its current 7 million.
As a result, Verizon must carefully manage its debt payments, business investments, and dividend payouts. Failure to strike this balance could jeopardize its streak of dividend increases.
The telecom's free cash flow (FCF) is crucial in assessing its ability to shoulder these obligations. Verizon's year-to-date FCF was $14.5 billion as of Q3, slightly down from $14.6 billion in 2023.
However, the Frontier acquisition will not enhance Verizon's FCF. In fact, Frontier ended Q3 with negative FCF of $81 million. Worse still, Frontier is not profitable, posting a Q3 net loss of $82 million.
Should you buy Verizon shares?
Verizon views fiber as a critical growth area. If it can make Frontier's operations profitable, the acquisition could be beneficial in the long run. Customers who use both Verizon's mobile and internet services show higher loyalty, according to the company.
Verizon's Fios sales could definitely benefit from this pairing. While Fios sales totaled $3.2 billion in Q3, that's just a fraction of Verizon's overall Q3 revenue of $33.3 billion. The vast majority of its earnings come from its mobile-wireless service, which saw Q3 sales increase 3% year over year to $19.8 billion.
If fiber and mobile services can drive sales growth in the wireless segment, that's good news for investors. Adding to that, Verizon's 18-year track record of increasing dividends and dependable free cash flow make it an attractive income stock as a long-term investment.
But before buying, consider the stock's price-to-earnings (P/E) ratio, which helps evaluate stock valuation. Verizon's P/E multiple is currently higher than it has been in years. Therefore, there's no need to rush to purchase shares now. Verizon stock has retreated from its 52-week high of $45.36 reached in September. Wait for the share price to dip further before deciding to invest for its promising dividend.
The Future of Verizon's Dividend: Despite the Frontier acquisition potentially boosting Verizon's Fios revenue, the telecom's high debt levels and negative free cash flow from Frontier could pose challenges in maintaining its dividend payouts. Investors might want to monitor Verizon's ability to manage its financial obligations and dividend payments before making a decision to buy.
Making Informed Investment Decisions: While Verizon's attractive dividend yield and income-generating potential make it an appealing investment, it's crucial to consider other financial metrics like the price-to-earnings ratio. By waiting for a potential share price dip and evaluating the company's financial health, investors can make more informed decisions.