Verizon’s (NYSE:VZ) most recent earnings report likely has led many investors to ask the question, “Is Verizon still a good long-term buy and hold investment?”
The short answer is “it depends,” just as it has been for a number of years. Verizon investors need to understand that buying shares of VZ is not the same as buying shares of high-flying growth stocks Tesla (NASDAQ:TSLA), Netflix (NASDAQ:NFLX), or Amazon.com (NASDAQ:AMZN).
Any purchase of the latter three stocks is expected to produce share-price appreciation over time. But such gains are not as likely from buying Verizon today.
In its first-quarter results, Verizon announced revenue of $29.81 billion and earnings per share of $0.95, with both falling below estimates of $30.48 billion in revenue and $0.96 earnings per share, respectively. The company also posted a loss of 307,000 wireless subscribers, including 289,000 who were cell phone users who are billed each month.
Such cell phone customers are the most valuable in the wireless industry. One research firm said this was the first time Verizon has ever reported a loss in this category.
The main reason for this decline is increased competition from AT&T (NYSE:T), T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S). The wireless industry is becoming more and more competitive and T-Mobile has shown it is willing to take a hit on profit margins, if it means it can increase customer additions. T-Mobile has increased its estimates on customer growth from 2.4 million to 3.4 million up to a range of 2.8 million to 3.5 million.
One of the big reasons competition is getting tough for Verizon is because wireless networks across the board are improving. AT&T, T-Mobile and Sprint now boast nearly the same coverage and reliability as the industry leader Verizon. What used to be a wide competitive moat for Verizon against is competitors is now a narrow and shallow strip of water.
As far as the original question about Verizon as a long-term, buy-and-hold investment, it depends on if you believe the company will continue to be a top telecom provider. If so, you will not make a huge profit from the price appreciation of the stock, but instead from its reliable and healthy dividend payments.
Shares of Verizon currently trade at 14 times trailing earnings. That is a rather low price to earnings ratio, meaning the stock could see a slight bump in the near future, especially if it figures out a way to monetize its acquisition of Yahoo! (NASDAQ:YHOO). But don’t expect more than a 5% to 10% increase over the next year or two. VZ currently has a dividend yield of 4.73%, meaning if the stock trades exactly where it is today just one year from now, you will still make at least 4.73% on your investment. Once that dividend return is compounded over two or three years, your investment return would be even higher each following year.
Unless Verizon starts seeing a few million customers a quarter leaving for other service providers, the stock shouldn’t lose much value in the future and still should be able to pay a healthy dividend. Lastly, investors need to remember, this was the first time Verizon has ever posted a loss of wireless customers. As a result, this situation could just be a one-off event and not a trend at this time. Today may turn out to be a great time to start buying while Wall Street sentiment on the stock is low.
Matt Thalman has been writing since 2011, shortly after gaining his MBA, but his love for the markets began in undergrad when he first learned about the awesome power of compound interest. Thalman mainly focuses on consumer-facing stocks and general investing topics, but will also cover other areas of the markets if he believes there is something important investors need to know. Follow him on Twitter @mthalman5513.
At the time of this writing, Matt Thalman owned shares of Verizon, Amazon.com, Netflix, and Tesla.