Verizon (VZ) is a telecommunication conglomerate and one of the largest in the world, with a market cap of more than $160 billion. The company recently announced a $5.8 billion impairment charge that it was taking, a long line in a string of bad news, where it spent almost $80 billion at a 5G auction.
Verizon Spending Costs
Verizon’s biggest problem has been it’s getting into a more competitive and expensive market. T-Mobile has become a major player that it wasn’t before and AT&T remains an ever present competitor.
The above “catchup” acquisition show the spending requirements that companies face. Verizon had to spend an astounding $47.1 billion to make up for a lot of the spectrum that it was missing for 5G. And that doesn’t count the fact that at the end of the day, 5G hasn’t extended these companies revenue much, it’s just helped out users with their speed.
Being a cellular company is incredibly expensive from a capital point of view. The company’s annualized capex requirements are almost $20 billion, and while many expect that to decline after initial 5G, it’s still going to replay $15+ billion / year.
Verizon Debt Load & Interest Rates
Verizon’s core problem in driving shareholder returns is the amount of debt that it has in a time of rising interest rates.
The company has a substantial amount of debt going out until 2061. The company’s total debt is almost $160 billion which means at the current federal funds rate adjusted for a corporate premium, the company’s annual interest obligations could be more than $10 billion. Fortunately, it’s helped by the debt lasting until 2061, with debt maturing in the next year $12 billion.
However, as long as federal funds rates remain high the company has to rollover more of it debt into higher interest rates. We estimate that will cost the company roughly $400 million / year long-term for each year that interest rates remain higher (although the company could always refinance if it needs to do so).
Verizon has had some tokens of growth within its portfolio.
Companies prepaid businesses are much weaker across the board but the company added 100K postpaid phone net adds. It’s also managed to obtain early access to remaining C-band spectrum from satellite providers, which will enable it to become more competitive quicker with the spending it’s done. Lastly, the company has continued to increase its broadband portfolio.
That represents a potential alternative for the company, but it’s also something that all other major wireless players (i.e. AT&T are doing). So we expect its potential size will be much smaller in relation to the company’s business.
Verizon Cash Flow
Verizon remains focused on generating strong cash flow.
The company earned $28.8 billion in CFFO, with $14.2 billion in capital expenditures. The company benefited from both reduced capital expenditures and increased CFFO to earn annualized FCF of just under $20 billion, or a strong double-digit FCF yield. The company’s dividend of just under 70% used up ~60% of the company’s FCF a rate that the company can easily afford.
The company’s debt load remains expensive, but at least right now with the company’s FCF, it can continue to afford it. The company also has an extra $8 billion annualized it can use to pay down its debt increasing FCF. Over the next half a decade, the company can pay down a third of its debt saving more than a billion on interest back to FCF.
The company’s cash flow which enables it to continue managing its debt and paying a reasonable dividend makes it a valuable investment.
The largest risk to our thesis is Verizon’s concentration as competition increases. Dish has been purchasing spectrum and while as of now it’s not competitive, it could be a market that Amazon or another large tech company are interested in entering through Dish. T-Mobile is another giant after the merger with Sprint that’s been much more competitive in 5G.
The downside is that these competitors push down margins in a capital intensive business, which can hurt future shareholder returns.
Verizon has an impressive portfolio of assets. The company has spent $10s towards $100 billion building out its 5G network. In exchange, it hasn’t been rewarded with dramatically higher revenue per customer or a massively larger customer base. Instead, it had higher competition, primarily from the acquisition between T-Mobil and Sprint.
Despite all of this, Verizon still has a bright future. It’s cutting capital expenditures and increasing CFFO, leading to growing FCF. The company’s 7% dividend yield is one it can comfortably afford and as it pays down debt, especially if rates go down, interest savings will increase. All of that makes Verizon a valuable investment at this time.