Verizon: $60 Ceiling

The theme for

(VZ) remains one of a stock trapped at the upper end of the trading range due to mediocre growth trends and prospects. My investment thesis has held that the wireless giant needs a major catalyst like 5G to push the dividend yield below 4% and the Q3 results don't provide any indication such a push will occur. The stock is trapped around a ceiling at $60 as the sector starts giving away video streaming services.

Image Source: Verizon website

Going Nowhere Fast

Verizon clearly isn't the worst company in the wireless sector, but the wireless giant still struggles to generate anything considered as real growth. For Q3, the company saw revenues grow a meager 0.9% while EPS was up $0.03 over the same period last year. Sure, accounting changes impacted EPS growth, but the market would focus on the meager revenue growth regardless.

One only has to look at the wireless retail connections to understand the growth problem. The company has seen a decline in connections since the peak last Q4 at 94.5 million connections. Growth in postpaid accounts helps some with revenue and profit metrics, but these gains are offset by declines in media and wireline.

Source: Verizon Communications Q3'19 presentation

The failure to generate any revenue growth in the media segment leaves 5G as the only major catalyst for revenue growth. Verizon announced two more cities were added to the 5G Ultra Wideband mobile network to bring the total to 15 cities, but the revenue potential remains relatively bleak in the next couple of years.

The very telling sign on the Q3 earnings call was how CEO Hans Vestberg shifted the conversation from the 5G pricing model (a la charge more) asked by Michael Rollings of Citi to the benefits of offering

Disney+

(DIS) promotions:

Of course, as we get into 5G, you get a fair amount of new potential ways of charging. I still think that our model for unlimited is really both helping us and our consumers to go to actually move up in the value chain from getting into the, let's say, the lower tier of unlimited coming up to the sort of the highest. It's a wide range and, of course, the highest is including 5G. Today, we're waiving that, but all time we see that if you're going to get that ubiquitous sort of coverage and capacity, and -- that will give us an opportunity.

At the same time, we started adding our flexibility in our business model, having Apple Music, having Disney+ and all of that in the same time.

The issue is that converting a subscriber from 4G to 5G is even a minimal revenue boost in the $10 range because Verizon is waiving that cost now. The only additional revenue boost will come from any processes down the road that generates new and unique connections for additional revenue streams beyond more of an upgrade cycle with the retail connections moving to 5G.

Investors really need to grasp that as Verizon moves into 30 5G markets, the big discussion on the earnings call at the end of October is a promotional offering of a video streaming service. The move was a necessity due to

(T) planning to offer HBO Max free to subscribers plus other additional promotions in the sector.

Maxed Out Yield

The stock closed the week following Q3 earnings at $60. As the below chart shows and my research has long pointed out, Verizon doesn't rally to where the dividend yield falls below a 4% yield.

Data by YCharts

The wireless giant remains a free cash flow machine, but the company isn't generating any growth in this metric to suggest the dividend hike will grow at a faster rate. In fact, the FCF remaining after the dividend payout is equivalent to $6.9 billion for the last two years.

Source: Verizon Communications Q3'19 presentation

Verizon still has $110 billion in total debt. While the debt is completely secured by a debt ratio of 2.1x, the company still doesn't have the catalysts to warrant major dividend hikes with a large debt load.

Takeaway

The key investor takeaway is that a case doesn't exist for Verizon to rally above $60 and push the dividend yield below 4%. The stock has constantly failed to find any buyers when the yield dips below this key threshold and the lack of a revenue catalyst from 5G is problematic.

The opportune time to buy Verizon is on any dip into the mid-$50s where investors will obtain a higher dividend yield plus decent capital appreciation for a solid total return.

Disclosure:

I am/we are long 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.

Additional disclosure:

The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.