Verizon Communications is a telecommunications company. Its main market is the United States. The company is reliable and regularly pays dividends. The average dividend yield is 4.8%. Let’s take a closer look at this company and decide together whether it is worth our attention in 2022.
The global value of the telecommunications industry is estimated at $1.7 trillion. It’s a huge market, and about a third of it is in the United States. Despite the enormous size of the market, only a few companies control it in the States, and Verizon is one of them. The company’s other competitors are AT&T and T-Mobile. These three whales control about 99% of the telecommunications market in the United States.
Why being so large, there are only three companies in the market in the United States. The fact is that all three companies spend billions of dollars each year to build and maintain their networks. In 2021, Verizon spent about $18 billion on these investments. The money went toward licensing 5G, installing new communication towers, laying fiber optic cables, satellites, and expanding the car fleet. The company has an enormous infrastructure, and any competitor would have had to spend billions and billions over many years to build something like this. With such a head start, Verizon can fear neither economic shocks nor competitors.
The company is betting on 5G technology
Verizon is not a fast-growing company. Its revenues have grown by about 2% over the last decade. According to experts, the American telecommunications company will have a chance to accelerate its growth in the coming years, all thanks to 5G technology.
This communication format provides faster data transfer than 4G. The future belongs to this technology because autonomous transportation, the Internet of Things, and artificial intelligence are all impossible without the new communication format.
Demand for 5G in the U.S. grew in 2021. At the end of Q3, more than a quarter of the company’s corporate customers were using equipment that supports this communications format. The introduction of new technology led to a 34.8% increase in specialty equipment sales compared to Q3 2020. As more and more customers switch to the new format, the company’s revenues will continue to grow.
Not just 5G-enabled equipment, but new-format wireless is attracting customers. New trends have helped Verizon earn $17.1 billion from wireless services, up from just under $16.5 billion in the third quarter of 2020.
5G wireless services are projected to continue to grow in 2022, with revenue growth of at least 3% from this segment and at least 4% from 2024.
Reliable dividend partner
Verizon is not only a reliable business but also a regular dividend payout, which, incidentally, attracts many investors. The company’s dividend yield is about 4.93%. The company’s management decided to pay dividends to its shareholders no matter what. While several companies, such as Ford Motor, have either cut or canceled dividend payments in 2020, Verizon has not only shared its profits with shareholders but also increased them.
The issuer pays and raises dividends because it can steadily generate free cash flow. For example, when revenue is low, as it was in 2020, free cash flow was $23.6 billion, up 32.4%, in 2019.
In 2021, the issuer accumulated a free cash flow of $17.3 billion over three quarters.
Verizon’s high performance
Dividends and consistent free cash flow are just two of the company’s many strengths. There is also a third factor of attractiveness – strong fundamental data. For example, based on 2021 results, its key financial indicators not only exceeded those of 2020 but also those of 2019. The tech company’s revenue in 2021 for three quarters was $99.5 billion, compared to $94 billion in 2020 and $97.1 billion in 2019.
Such good results were achieved because of the company’s ability to attract customers, despite the highly competitive market and the coronavirus pandemic.
Another growth factor for Verizon was the move by many companies to work remotely, which led to the expansion of the Verizon Fios Internet service. In Q3 2021, consumer revenue for this division jumped 4% year over year to $29 billion. During the earnings period, this division added 98,000 customers.
The management also plays a big role in generating consistent profits. In 2020, when the pandemic hit and the U.S. went into lockdown, the corporation began to accumulate cash. At the end of 2020, the issuer had a cash cushion of $22.2 billion, compared to $2.6 billion in 2019.
Now that fears about the pandemic are going away, the company will use that money to make dividend payments and reduce debt, which grew in 2021 when the company spent $53 billion to get frequencies for next-generation 5G networks.
A fly in the ointment
The only thing that spoils the near-perfect picture is the company’s debt. At the end of Q3 2021, the issuer’s total debt was $151 billion. Not only has the debt grown since 2020, when it was $129 billion, but it is now well above total equity, which is $78 billion. The debt is largely due to additional investment in the 5G communications spectrum.
Despite its high debt obligations, the company spent nearly $3 billion on interest expense in 2021, down 13 percent from the same period in 2020.
According to experts, it was the high debt indicator that caused the decline in the company’s shares in 2021. Nevertheless, when the investment in 5G is complete, the company will be able to use some of its cash flow to cover the debt. Most of it is projected to be closed by 2025.
Should you buy or sell Verizon shares?
The company plays no small role in the U.S. telecommunications business. Despite its debt obligations, we believe that investors should pay attention to the shares. Free cash flow should quickly reduce this debt, and the introduction of 5G technology in the coming years should increase profits. The profit growth on the background of the P/E ratio equal to 11 should also attract investors. The cherry on top is the high dividend payout.
Now, the company’s shares are trying to return to growth after a prolonged correction. Buyers created a defense of around $50, from which the asset rebounded, rising to $54.60. If the price stays above $52, we expect it to rise towards $57 and then $63.
The beginning of the new year is a perfect time to look for stocks with good growth potential. The technology company Intel stands out among such contenders. In recent years, it has lost a large part of the chip market to its competitors, yet it still controls a large part of it, and CEO Pat Gelsinger has a clear plan to bring the company back to its former glory. Let’s talk about the outlook for Intel stock below.
The company’s main competitor is AMD, which displaced the issuer from several markets. According to PassMark, in the last five years, the share of the controlled market of Intel processors has fallen from more than 80% to 60%. Yes, the company has given up its position, but it still has 60% of the market, estimated at $425 billion. And given that semiconductors are the key to high technology, the company has enough resources to maintain its position and even return part of the market.
According to Intel reports, demand remains high across the company’s divisions. Intel technologies are in demand not only in data centers but also for autonomous transportation and the Internet of Things. In the 3rd quarter, the issuer’s revenue grew by 5% year-on-year, and earnings per share increased by 64%.
After the publication of the quarterly report, the CEO of Intel said that they expected an improvement in financial performance from quarter to quarter.
In December 2021, the issuer announced plans for a public offering of Mobileye. It is an Israeli company that develops driver assistance systems for collision mitigation. According to the most conservative estimates, the value of this company after the release to the stock exchange could reach $50 billion. After listing, Intel will retain a controlling stake. The chipmaker is also not planning to change anything in the structure and management of the company.
Mobileye’s listing is just one of those steps that will bring the company closer to a leading position in the market.
Intel wants to regain industry leadership by 2025. To do this, the issuer is changing the way it produces chips. The company is expanding slower than its competitor AMD, as it does everything in-house, including development and production. To speed up the process, Intel plans to buy several components from TSMC, which should speed up chip development.
Moreover, the company will spend $20 billion to build new chip plants in Arizona. Intel also plans to create a foundry division because it wants to work with semiconductor companies that need a reliable chip maker.
The company generates a constant free cash flow (over the past four quarters, the issuer has generated $17 billion), which allows the issuer to pay dividends and to constantly increase them. Over the past five years, the payout has grown by 32%. Now the dividend yield is 2.6%, which is more than twice the yield of the SP500. Moreover, the company spends no more than 32% of its cash flow on dividend payments, which gives enough room for further increases in payments.
The problems aren’t going anywhere
Now that the meta-universe theme is coming to the forefront, the company was thinking about getting in the race for part of that market. Nevertheless, it may have difficulties here, as its competitor Nvidia also has plans for this pie. Nvidia is the market leader in GPUs, which gives it a natural advantage in the meta-universe.
Success with the meta-universe also depends on data centers. Intel’s data center division (DCG) revenue grew 10% in Q3 2021 compared to the same quarter in 2020. However, Omdia recently said that AMD set a new revenue record in the data center market in September. It is another signal that Intel may have difficulties in this area.
Moreover, despite management’s efforts to improve Intel’s products, product development cycles in the chip industry typically take three to five years. In other words, Intel’s prospects of regaining market share are currently in doubt.
Although it is too early to give up. Intel has been a leader in the industry for decades and continues to bring in more revenue than AMD and Nvidia combined. Nevertheless, investors are not confident that the issuer will return to this area.
The financial indicators are not encouraging either. For the three quarters of 2021, the company’s revenue grew only 1% compared to the same period in 2020. Net income for the same period grew at about the same rate to just over $15 billion. Thanks to returns on equity investments and lower tax expenditures, the company was able to offset an increase in operating expenses of nearly $4 billion.
Forecasts for all of 2021 say lower earnings compared to 2020. It explains the weak growth of the paper over the last year. It was only 10%, while the S&P500 rose 31% over the same period. The issuer has a price-to-earnings ratio of about 10, well below AMD’s profit multiple of 46, and Nvidia’s P/E ratio of 92.
According to our expectations, Intel will have another weak year, despite positive trends. The issuer’s profits are projected to fall by almost 30% in 2022, while revenues will remain at previous levels.
In our opinion, it is too early to talk about buying the paper. The company is just getting ready to regain its lost positions, and it will take more than a year until it does so.
Now, the paper will be suitable only for long-term investors, who are ready to withstand a long drawdown. For short-term traders, this paper is unlikely to become interesting in the coming months.
Last week’s quarterly reports
At the beginning of January 2021, we gave a positive outlook for Citigroup stock. Unfortunately, the forecast did not come true, and the bank’s stock went down. Citigroup’s Q4 net income fell 26.4% YoY to $3.17 billion, or $1.46 per share. Analysts were expecting earnings to come in at $1.39 per share. Quarterly revenue rose 1.1% to $17.02 billion. The revenue forecast was $16.85 billion.
If we sum up the results of 2021, the profit figure has almost doubled, up to $22 billion. In 2021, the bank paid 56% of its profits in dividends to shareholders. At the moment, the dividend yield of the company exceeds 3% and is one of the highest in the banking sector.
Despite the positive report, sellers returned to the market. After testing the area of $68.50, the paper retreated to $64.50. It will be possible to speak about new purchases only after fixing above the level of $66. In this case, the buyers’ target will be the area of $80.
Netflix’s Q4 2021 report disappointed investors. The world’s largest streaming service reported expectations of a decline in the growth rate of paid subscribers. After the report’s release, shares of the service began to decline.
During the earnings period, the number of subscribers grew by 8.28 million to 221.8 million. According to the company’s forecasts, the growth was expected to reach 8.5 million people. Netflix’s revenues grew by 16% compared to the same period in 2020. The net income of the issuer in Q4 grew by 12% to $607 million.
The company is still on our waiting list, and we will take no action on it shortly.