Many investors seeking stable and reliable income from their investments turn to companies with established track records of dividend growth. To raise dividends consistently year after year, a company must have competitive advantages and recession-resistant business models. Quality dividend stocks have long histories of operating in a variety of environments, and in many cases, have paid dividends through those tough environments. We call these blue-chip stocks, borrowing a term from the world of poker where the blue chips carry the highest value. Blue-chip stocks are a great place to start for someone looking to generate passive and reliable income over the long-term. Verizon Communications (VZ) is a blue-chip dividend stock with a 4.5% yield, a reliable dividend, and over a decade of annual dividend increases. Verizon stock offers strong return potential with a high level of reliable income.

Verizon: Blue Chip Stock for Reliable Dividends

Verizon Business Overview

Verizon is a communications giant, offering a full suite of communication, information, and entertainment products and services to consumers, businesses, and governments worldwide, although its business is concentrated mostly in the US. The company operates in three segments: Verizon Consumer Group (69% of revenue), Verizon Business Group (24% of revenue), and Verizon Media Group (7% of revenue).

Verizon’s products include postpaid and prepaid wireless service, internet access, wireless equipment, such as smartphones and tablets, as well as voice services. Verizon’s business is mostly concentrated on wireless service, where it is a leader in that space. Indeed, the company has nearly 100 million wireless retail connections, and boasts 6 million broadband connections, as well as 4 million Fios video connections, and 25 million fixed-line connection mostly in the northeast. Wireless contributes three-quarters of all revenues, and broadband and cable services account for about a quarter of sales. The company’s network covers ~300 million people and 98% of the U.S. 

Verizon was founded in 1983 and was formerly known as Bell Atlantic before changing its name to Verizon in 2000 when Bell Atlantic and GTE merged. Verizon acquired Alltel in 2009, AOL in 2015, and Yahoo in 2017 and a host of smaller companies. Verizon bought out its joint venture partner, Vodaphone, in 2014. Today, it trades with a ~$228 billion market capitalization and enjoys $128.3 billion in annual revenue in 2020.

Growth Prospects

Verizon, despite its utility-like services and massive scale, has produced strong growth for the past decade. Indeed, the company’s earnings-per-share grew by nearly 9% annually from 2011 to 2020, an impressive feat by any measure. However, we see forward growth as much lower given the company’s challenged television services, which are more than offset by a strong core wireless business. In total, we expect 4% annual earnings-per-share growth in the coming years. We forecast this growth to come from roughly equal parts of revenue growth, margin expansion, and float reduction via share repurchases. This charts below from StockRover* show the growth of sales and earnings per share.

(Click on image to enlarge)

Source: StockRover*

Source: StockRover*

Verizon ended 2020 with a very strong fourth quarter earnings report in late January. The company’s earnings-per-share for the quarter rose 7.1% year-over-year on an adjusted basis at $1.21 and beat expectations. Revenue was essentially flat against the year-ago period at $34.7 billion, but also beat expectations.

The company posted net adds of 279 thousand postpaid phone accounts, and wireless postpaid net adds of 703 thousand. Retail postpaid churn, a closely watched metric given Verizon’s heavy reliance upon wireless service revenue, was 0.76%, while retail postpaid churn was 0.98%.

Lower equipment revenue and lower business revenue offset some of the gains in the wireless segment, but declines were quite small.

For the full year, adjusted earnings-per-share rose 1.9% to $4.90, beating estimates, while revenue was down 2.7% to $128 billion. Verizon guided for $5.00 to $5.15 in earnings-per-share for this year, and our expectation is currently at the midpoint at $5.08.

Importantly, we see Verizon holding up well through a variety of economic environments, having posted earnings growth during 2020, a year when it had every excuse to see a decline in earnings. While Verizon may not be the fastest grower in the market, we like its steady nature through economic cycles, which helps enable its ability to continue to raise its reliable dividend.

Competitive Advantages

Verizon’s competitive advantages stem from its ability to maintain a high level of customer satisfaction, as well as its sheer size and scale. Verizon is consistently rated as a top consumer pick in wireless services, which enables it to enjoy very low churn rates. In turn, this means that with a sticky customer base, Verizon isn’t spending heavily with marketing dollars going to customer acquisition. 

In addition, a loyal customer base means Verizon can push through pricing increases over time to boost organic revenue, which it has done successfully for many years. This low wireless churn rate is a key competitive advantage for Verizon, and it continues to invest billions of dollars in its infrastructure – such as 5G capability – to ensure it remains the top pick for consumers and businesses for wireless service.

Compared to the other communications giant in the US – AT&T (T) – Verizon is very focused on wireless service, whereas AT&T is aiming to be a communications and entertainment conglomerate. Verizon’s focus on maintaining its advantage in wireless service is key for sustaining its competitive advantages.

Verizon also enjoys massive scale, and like other utility providers, scale helps not only drive margin improvements over time, but it would be massively difficult for any other competitor to supplant Verizon from its wireless services position. The amount of infrastructure required to do so would cost tens of billions of dollars – if not more – so we see Verizon’s advantage as durable.

Expected Total Returns

With the share price at ~$55, we see total returns as quite attractive for Verizon. We see $5.08 in earnings-per-share for this year, so the stock trades with a price-to-earnings ratio of 10.8. That compares quite favorably to our fair value estimate of 13 times earnings, so we forecast a nearly-4% annual tailwind to total returns from a rising valuation given the stock is undervalued today.

Verizon’s dividend yield is also quite strong at 4.5%, helping to send total forecasted total returns to 11.6% annually for the next five years. Given this, we rate Verizon shares as a buy.

Verizon Reliable Dividend and Growth

Investors not only get strong forecasted total returns and a mid-single digit div yield, but Verizon has been raising its dividend for 16 years now making the stock a Dividend Contender. This chart below from StockRover* shows the dividend growth history. And with the current payout ratio at just 50% of earnings, we see not only many more years of dividend increases on the horizon, but Verizon’s dividend looks quite safe. Even during a very sharp recession in 2020, Verizon’s earnings grew, so we do not foresee any plausible scenario where Verizon would need to cut its dividend at this point. Verizon provides investors with a high current dividend yield and a reliable income stream for years to come.

(Click on image to enlarge)

Source: StockRover*

Final Thoughts on Verizon – Blue Chip Stock for Reliable Dividends

Investors looking for a reliable dividend and income stream should put Verizon on their watch list. The stock looks undervalued at this point, the current yield is about three times that of the S&P 500, and we see many more years of dividend increases on the horizon. Verizon is currently a Dividend Contender and should reach the 25+ year mark of dividend growth, it has a decent dividend yield, acceptable dividend safety, and a reliable dividend growth rate.

Combining these factors with a positive earnings growth outlook, and it appears Verizon stock has strong projected total returns with a safe and reliable dividend. Verizon is a reliable blue-chip stock for income investors.