Tech Stock Sensei

Verizon Stock: Not Worth the Dividends Right Now

Verizon Communications Inc. (NYSE:VZ) is under pressure amid declining subscribers and unfriendly market dynamics. Verizon stock is down over 10% since the start of 2017. In the first quarter, Verizon reported a massive fall in the subscriber count. But in the second quarter, the company made a rebound. Verizon is set to announce third quarter results on Thursday. The firm is suffering due to pricing wars in the carrier industry. To gain and sustain subscribers, Verizon will have to slash its prices. This step will take a toll on margins, which are already on the decline.

Recent quarterly reports show that Verizon has started to rely on its device sales segment, which has low margins.

Verizon’s business is not as diversified as its competitors like AT&T. Analysts now have a consensus that the wireless business is becoming a difficult domain to operate in.

Verizon also has a burgeoning debt as the company borrowed a lot of money in the past to fund its buyouts and general business needs. Verizon’s long term debt stands at about $120 billion. The biggest concern here is that Verizon isn’t making any substantial efforts to retire its debt. It is continuously refinancing it. The company spends about a fifth of its total operating income on interest expense.

The primary reason Verizon is unable to solve the debt problem is its hefty dividend yield of over 5%. In September, the yield on Verizon stock increased by 2.2%. But analysts think that there won’t be another dividend increase in the near future as the company is unable to sustain high dividends with increasing expenses and debt.

Verizon is relentlessly trying to cling to its traditional business and leverage its market lead to grow its lucrative postpaid subscriber base. The company is also working on new platforms for digital growth. Verizon is betting on Yahoo and AOL for online content growth.  But AOL and Yahoo will take a lot of time before they start making a tangible addition to Verizon’s balance sheet. On the other hand, AT&T’s acquisition of Time Warner will be a winning stroke with which AT&T will immediately diversify its business and get a moat in the content industry.

Therefore, we currently see no growth catalyst or rationale to buy Verizon stock in the near future.

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