The veteran telecom giant boasts a large dividend, but an impending acquisition may muddy the waters.
Shares of telecom giant Verizon (VZ -0.22%) have been on an upswing. The stock is up about 14% over the past 12 months at the time of this writing. While a rising share price is welcome, perhaps the stock’s most appealing aspect is as an income investment.
Verizon’s dividend serves as a reliable source of passive income, given its 18 straight years of increases. It also sports an impressive forward-dividend yield of 6.5% as of Nov. 7.
Given these positives, it seems like Verizon’s stock is worth buying for the long haul. But there’s a wrinkle to consider. In September, Verizon announced the impending acquisition of Frontier Communications Parent. Here’s a look into how the Frontier purchase may affect whether to buy Verizon stock.
Verizon’s gains from a Frontier acquisition
Verizon’s desire to acquire Frontier is part of its gambit to capture customers in the expanding fiber-optic internet market. Demand for high-speed internet is increasing due to data-intensive online activities such as video calls and streaming media.
A key benefit of the deal is that it would expand Verizon’s fiber network. Frontier provides fiber-optic internet service across 25 states, which would raise Verizon’s fiber footprint to 31 states.
In terms of revenue, Frontier generated $1.5 billion in the third quarter, up 4% year over year thanks to rising adoption of its fiber offering. Meanwhile, Verizon’s Fios-branded fiber product produced $3.2 billion in Q3 sales, which was essentially flat from the previous year.
Once the Frontier acquisition closes, which is expected to take 18 months, Verizon’s Fios revenue will be boosted by Frontier’s addition. The acquisition makes sense in terms of strengthening Verizon’s broadband business, but downsides exist.
Concerns around Verizon’s deal for Frontier
The Frontier purchase will be an all-cash transaction valued at $20 billion. According to media reports, Verizon looks to take on debt to finance the deal. The telecom already shoulders a hefty $126.4 billion in unsecured debt as of Q3.
Moreover, Frontier has amassed its own debt in excess of $11 billion. The company has stated, “We have a significant amount of indebtedness, and we may incur substantially more debt in the future. Such debt and debt service obligations may adversely affect us.”
Adding to this, Verizon will incur further capital expenditures as it continues to expand its fiber network. Frontier alone plans to reach 10 million homes by 2026, up from about seven million today.
All of this means Verizon must carefully balance debt payments, investments in its business, and dividend payouts. Otherwise, its streak of dividend increases could be at risk.
The telecom’s free cash flow (FCF) is an important indicator of its ability to meet these obligations. Exiting Q3, Verizon’s year-to-date FCF was $14.5 billion, which is a slight drop from 2023’s $14.6 billion.
When it comes to FCF, the Frontier acquisition won’t help. Frontier ended Q3 with negative FCF of $81 million. In fact, Frontier is not a profitable business. The company generated a net loss of $82 million in Q3.
To buy or not to buy Verizon shares
Verizon views fiber as an important growth area for the company. If it can turn Frontier’s operations into a profitable business, the deal could be a good move over the long run. That’s because customers who adopt both Verizon’s mobile and internet services “show increased loyalty” and are less likely to leave the carrier, according to the company.
Certainly, Fios sales could use a shot in the arm. Its $3.2 billion is only a minor portion of Verizon’s $33.3 billion in Q3 revenue. The bulk of the telecom’s earnings comes from its mobile-wireless service. This segment saw Q3 sales increase 3% year over year to $19.8 billion.
If fiber paired with mobile service can help the latter’s sales, that’s a positive for investors. This coupled with Verizon’s 18 years of dividend increases and dependable FCF generation makes it a worthwhile income stock to consider as a long-term investment.
That brings us to whether now is the time to buy. One factor to weigh is its price-to-earnings (P/E) ratio, used to assess stock valuation. The P/E ratio tells you how much investors are willing to pay for a dollar’s worth of earnings.
Data by YCharts.
The telecom’s P/E multiple is currently higher than it’s been in years. So there’s no rush to grab shares right now. Verizon stock has pulled back from its 52-week high of $45.36 reached in September. Wait for the stock to dip further before deciding to buy for its robust dividend.
