As we highlighted last August, increased network parity has led customers to prioritize customer service and pricing over network superiority when choosing a mobile provider, causing Verizon's industry leadership to fade.
With the American mobile phone market fully saturated, competition for new subscribers has intensified. This has slowed Verizon's customer growth to a crawl and accelerated promotional offerings, like free phones, that temper profitability.
Meanwhile, interest rates have climbed higher, with the 10-year U.S. Treasury yield rising from less than 3% in mid-August to 4% earlier this month.
A more competitive, slower-growing wireless market and rising borrowing costs (around 25% of Verizon's debt carries floating rates) create a somewhat muted outlook for 2023.
Management's full-year guidance issued earlier this quarter implies that Verizon will generate approximately $17 billion of free cash flow.
While that's up from $14 billion in 2022 thanks to lower capital spending on 5G network expansion, it's well below the $21 billion management had hoped for at Verizon's Investor Day one year ago.
Verizon's $11 billion dividend will remain covered with a reasonable free cash flow payout ratio near 65%. But chipping away at the company's $150 billion debt pile, which spiked in 2021 following record spending on spectrum licenses to support 5G, will take time.
With EBITDA expected to remain flat this year, Verizon's leverage will remain elevated and about 1x higher than management's long-term target.
Source: Simply Safe Dividends
Recognizing Verizon's slower pace of deleveraging due to the jump in interest rates and ongoing promotional environment in wireless markets, we are reducing the company's Dividend Safety Score from Very Safe to Safe.
That said, Verizon's recession-resistant cash flow, still-healthy balance sheet (including a BBB+ credit rating and stable outlook), declining capital intensity, and management's ongoing commitment to modest dividend growth support the payout.
While growth prospects may seem limited, especially with 5G monetization yet to materialize significantly, Verizon is a conservatively-run business committed to building and maintaining a quality network for the company's long-term benefit.
With the stock's dividend yield near a decade-high, conservative investors who believe in Verizon's staying power and appreciate the stock's bond-like features may find the company an interesting income idea.
Speaking of those bond-like features, since long-term interest rates bottomed in August 2020, Verizon's -27% total return has matched the performance of Vanguard's Long-term Bond ETF (BLV). Owning the stock has historically felt more like owning a fixed-income security.
We plan to continue holding Verizon in our Top 20 and Conservative Retirees portfolios and will provide updates on the firm as necessary.
