Verizon’s Huge Day
Contributor since 2012 / 42019 Followers
Summary:
- Verizon remains a buy for income, with the potential for capital appreciation if cash flow ramps up and leverage is reduced.
- Q3 earnings report on October 22nd is critical; strong cash flow and leverage progress could drive the stock higher.
- Our expectations for the revenue and cash flow print, if hit, can drive shares higher.
- Don’t forget about the pending acquisition.
- What kind of investor do you want to be?
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With the stock market at extremely stretched valuations, seemingly not having a care in the world with regard to all of the macro pressures of war, elections, and what may be softening economic data, we have offered a number of suggestions for our investors to generate income and preserve capital. We have specifically highlighted more and more income names and high-quality trading opportunities for our members. One name that we continue to have a buy rating on is Verizon (NYSE:VZ) which we are holding and trading around the core position, collecting the dividend, and employing options premium sales during this period of heightened volatility for even more income. This has led to success. We own this stock and some similar names for the income, but there is still great potential for future capital appreciation should cash flow continue to ramp up, and if leverage is reduced. If you see shares dip back into the $30’s this would be a strong add-on point, but we do rate shares a buy today at $43. Here is the deal. A very critical earnings season is around the corner and Verizon will report earnings for Q3 on October 22nd before the bell. In this column, we will discuss what we see ahead for Q3 performance and highlight what we are watching. With the recent price action, this is a critical day that is coming. If cash flow can come in strong, and there is further progress on leverage, we think the stock can motor even higher.
Verizon Q3 2024 revenue and customer outlook
For Verizon’s critical Q3, we are anticipating a very slight revenue increase versus a year ago. For Q3, we are looking for $33.35-$33.80 billion for the top line. We do think that Q4 will see a seasonally strong period with the new iPhone launch, but there is hefty competition and a lot of promotions among the major telecoms to attract and retain customers, and they all offer ways to get the latest phones. But for the long term, it really is all about the trend in cash flow, as well as progress on leverage. As you know, the cash flow metric is a critical indicator we watch for, especially with high dividend paying companies. A strong cash number will lead to increases in share prices. We have seen money come back into quality yield names as rates are starting to be cut, but the move off the bottom has been driven by cash flow. Thus, to keep the momentum coming, this is a really critical report.
So of course, the reported revenue will set the tone, as down line items in the report are all impacted if a revenue print is weak (or, very strong). Compared to the sequential Q2 we are also expecting gains. Back in Q2, revenue was $32.8 billion. Wireless growth was strong, while business revenues were down once again. We expect the same in Q3. In the wireless segment, there was 3.5% revenue growth from last year to $19.8 billion, and in Q3 we are looking for 2-4% gains. There were 28,000 Fios Internet net additions in Q2, and while it is growing, that is slowing. We expect another quarter of 25,000+ Fios net additions. We are looking for Verizon’s retail postpaid net additions of 275,000+ and wireless postpaid phone gross additions to increase in single-digits year-over-year. We are looking for churn below 1.0% for retail postpaid customers. For broadband, we are looking for net additions of 395,000. Business sign-ups continue to be a wildcard, but provided that there are no declines of more than five or so percent, all things combined revenue should be in the mid-$33 billion range.
EBITDA and earnings outlook
Provided we see the customer adds and revenues around our targets, the other wildcard here will be operating expenses. In Q2, operating expenses declined from $25.4 billion to $24.98 billion, driving adjusted EBITDA to $12.3 billion, with EPS of $1.15. For Q3, we are looking for similar cost controls as we saw in Q2. We are targeting operating expenses of $25.0 billion and operating income of $7.9-$8.0 billion. For adjusted EBITDA, we are targeting $12.2-$12.4 billion. On a per-share basis, assuming our projections hold within standard variance, we see EPS of $1.17-$1.19 for Q3, which would be a slight decline from a year ago at the midpoint.
Free cash flow
Free cash flow in our opinion is a key indicator for Verizon. As the cash flow metrics have improved in recent quarters, the stock has reacted favorably. When cash flow was declining, so was the stock. Further, the free cash flow number is key to covering the dividend payment, as the payout ratio is simply the amount of dividends paid out of total free cash flow. Cash flow from operations in Q2 was $9.5 billion, and capex was $4.1 billion. Dividends paid were about $2.8 billion in Q2. Free cash flow was $5.8 billion, and the payout ratio was about 48%. For Q3, we are looking for cash from operations of $9.8-$10.5 billion. Assuming capex and other expenditures of $4.5-5.0 billion, we are targeting free cash flow of $4.8-$6.0 billion. This will easily cover the dividend payments of $2.9 billion. Keep in mind, the dividend was raised again. While a few years ago the dividend coverage had been questionable, with recent and near-term future performance expectations, we view the dividend as safe given our cash flow projections.
Leverage
Coming into Q3, net debt was $122.0 billion. So far, we have seen a $4 billion reduction in net debt. That is positive. However, we also know that there is a $20 billion acquisition of Frontier in the works, which will be a hit to the balance sheet of course in the future provided the deal closes. We discussed the deal in more detail in this column. While there will be an impact on the balance sheet and debt metrics, it should lead to $500 million in cost synergies by 2027 and gives Verizon a huge leg up in its fiber and wireless assets. We will be closely watching for impacts on the balance sheet from the deal, plus with all other spending that is required to keep operations of a major telecom like this going.
Final thoughts
We like income names more and more as the payout on cash instruments will dwindle over the next year or two. Verizon has emerged from the ashes, with strong share appreciation in the last year, but we think it can continue if cash flow can ramp up. We like that the dividend has been raised once again, and is well-covered. The yield is still over 6% that is an attractive payout. We expect Fios growth and retail post-paid adds. Business revenues have and likely will decline more, though this segment is an opportunity for future initiatives and promotions to spur growth. Overall, earnings growth has stalled to a degree, but for the year, will be about flat to down a few percentage points. However, we still have two quarters of reports which could change that outlook. Overall, we still rate shares a buy for income, but pick your spots.
Analyst’s 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.
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