With a low-cost basis and robust growth potential, high-yielding Telcos like Verizon Communications Inc. (NYSE:VZ) are currently catching the eye of passive income investors. Similarly, AT&T Inc. (T) also presents an appealing value proposition.
Verizon Communications, witnessing a recent decline in its stock price, and AT&T both offer substantial growth in their broadband operations and attractive earnings multiples, strengthening their appeal to income-focused investors.
Notably, Verizon Communications raised its free cash flow forecast for 2023 in the third quarter and is currently trading at a modest 8.1x earnings multiple. With the enhanced free cash flow forecast and improved dividend margin of safety, Verizon’s stock is seen as a compelling investment opportunity.
Labeling VZ stock as a steal at its current price level, analysts are upgrading its rating to a STRONG BUY classification.
Reflecting back, an analyst points out a contrarian entry opportunity for Verizon Communications at the end of September. This was backed by the company’s robust broadband growth, strong postpaid business performance, and significant free cash flow. These factors continue to bolster the Buy thesis for the Telco.
Despite a 16% appreciation in VZ stock since, recent price weakness has not deterred analysts from reaffirming their confidence in the company. Verizon Communications’ continued customer expansion in its broadband segment and heightened free cash flow forecast further strengthen its investment appeal.
The improved free cash flow is identified as the primary reason why passive income investors should consider adding Verizon Communications to their portfolios.
Robust Broadband Operations
While Telcos may not be renowned for high sales and profit growth, they do exhibit substantial growth in their broadband offerings. Verizon Communications, particularly, has experienced a significant upsurge in its broadband customer base, adding over 400K customers for the fourth consecutive quarter.
With a current customer base of 10.3 million in its broadband business, the company’s Fios and fixed wireless products are evidently in high demand, driving the impressive customer acquisition trend.
Key Reasons to Invest in Verizon
Verizon Communications has raised its free cash flow forecast for 2023, expecting over $18 billion, up from the initial estimate of $17 billion. This upward revision is attributed to the company’s strong performance in its broadband segment.
This revision not only came as a pleasant surprise but also reinforced the confidence of income investors concerned about the sustainability of Verizon’s dividend.
With a leading dividend coverage ratio of 161% (based on $18 billion in free cash flow), Verizon Communications now offers a more secure dividend compared to previous estimates.
Furthermore, the company’s 7% dividend yield, which is backed by healthy free cash flow derived from growing 5G and fiber subscribers, presents a compelling investment case.
Similar to AT&T, Verizon Communications, despite not demonstrating significant per-share profit growth, secures a substantial free cash flow to cover its 7% dividend yield.
While Verizon Communications may not exhibit remarkable profit growth, its current 8.1x P/E ratio, strengthened dividend coverage, and a sustainable 7% yield position the stock as an attractive investment. This is especially true when compared to a more moderate valuation multiple, highlighted by the company’s substantial debt burden.
With any P/E ratio below 10x for a high-yielding passive income stock deemed a bargain, it is no surprise that Verizon Communications is being viewed as a compelling investment at its current price level.