Verizon Communications(NYSE: VZ) has quietly emerged as a turnaround story, with shares up an impressive 35% from its 52-week low.
Efforts by the telecom giant to streamline the business and focus on core strengths appear to be paying off. Solid wireless service revenue growth and an outlook for improving cash flow are great news in support of the stock's 6.5% dividend yield.
These themes will be on tap when the company reports its second-quarter results on July 22 (for the period ended June 30). Let's discuss the monitoring points and whether you should buy shares in Verizon now.
Positioning for more profitable growth
It's been a challenging road for Verizon in recent years amid a shifting macro backdrop and intense competition from rivals like AT&T and T-Mobile US. A secular decline in areas like business wireline and equipment sales has dragged growth, while results from the mobility business largely disappointed. Even with the rally this year, the stock is still down more than 30% from its all-time high.
Favorably, the latest trends have been encouraging. Verizon kicked off 2024 by reporting its best first quarter for consumer postpaid phone net additions since 2018. Management is citing the success of its "myPlan" offering, which allows customers to customize their phone plan with bundled features like cloud storage and entertainment subscriptions.
The metric that stands out is the wireless retail postpaid average revenue per account (ARPA), which reached $135.75 in Q1, up 3.1% year over year.
Verizon's ability to push premium pricing while maintaining stable churn has translated to a 1% revenue growth rate for the consumer segment in Q1, balancing a 2% decline in the smaller business group. Q1 free cash flow of $2.7 billion was up from $2.3 billion in the prior-year quarter.
Another strong point for Verizon has been the adoption of its fixed wireless access (FWA) internet connections delivered by 4G LTE or the 5G Ultra Wideband network. Verizon is finding that FWA is favored by customers as an alternative to fiber optic cables, given the ease of deployment, reliability, and flexibility.
There is optimism that Verizon is finally getting its long-term strategy right. The company is guiding for full-year adjusted EBITDA growth of between 1% and 3% from 2023. Cash flows are also seen climbing as capital expenditures normalize lower following years of heavy investments into the 5G infrastructure that now benefits from scale.
Image source: Getty Images.
What to expect from Verizon's Q2 earnings
The market will want to see a continuation of the company's operational and financial momentum into the second half of the year.
According to the average of published Wall Street estimates, Verizon is forecast to report Q2 revenue growth of 1.4% to $33.1 billion. While this single-digit increase is not much to get excited about, performance metrics between broadband net additions and wireless retail connections may be more important. A strong update from management will reaffirm Verizon's positioning within the telecom landscape.
On the other hand, data suggesting softer consumer spending dynamics in the U.S. and a muted environment for smartphone sales should keep the headline sales figure for Verizon subdued.
If there is room for the company to beat expectations, I believe it would be on the side of earnings per share (EPS), where the consensus estimate is $1.15 for Q2, representing a decline of 4.8% compared to Q2 2023. Verizon has several levers in support of profitability, including an ongoing cost-efficiency program. The potential for strong margins this quarter could be positive for the stock.
Ultimately, how shares of Verizon trade after the earnings report will likely come down to the tone management sets during the conference call.
Is Verizon a buy now?
I'm bullish on Verizon today, and I see room for shares to climb higher over the next year. The stock's high-yield profile is backed by the company's industry leadership, solid fundamentals, and an improved growth outlook. Room for interest rates to decline going forward could make Verizon's dividend even more compelling.
The caution here considers the normal volatility surrounding any earnings report. One strategy for investors to mitigate this risk is to buy shares over time and dollar-cost average into a position.
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Dan Victor has no position in any of the stocks mentioned. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.
