I view Verizon as a Telcom utility, where you expect steady cash dividend and some stock price growth. The stock price is a big disappointment for the last few years. It is my failure to understand that VZ is a free cash flow story and a big 5G investment cycle, and coming out of very low interest rate, etc. or at least I should have sold out when Buffett sold. ( Luckily, it is a 3% position, btw most of my position are around that range at least when I start and rarely I start with higher % or add to it ) . Here is the stock price performance…
The big number on 2021 is their 5G Spectrum purchase. The rise you are seeing recently is post earnings move-up. So what did we hear from the earnings that is causing the stock to rally…
From 3Q prepared remarks
We now expect 2023 capital spending to be at the higher end of the previously guided range of $18.25 billion to $19.25 billion.
From call transcripts
Obviously, we’re not going to guide on 2024 at this time, but I can share some qualitative aspects as we look ahead to free cash flow for 2024. On the plus side, we continue to focus the team on an improving EBITDA profile, and that’s the focus of the team. With respect to CapEx, we said a couple of times here in the past that we expect to run at $17 billion to $17.5 billion for 2024, which is back to a business as usual level of spend that you’ve seen from us
So the cap-ex is reverting to 2018-2019 range, will the company use excess cash to retire debt vs use it to buyback needs to be seen.
EPS - $4.97
PE - 7.25
dividend yield 7.4% ($2.66 per year; and 60% of FCF); expect dividend to go up by 0.05
Today VZ announced results and the stock moved up 6.7%. From Oct’23 low $30 has moved up 40%. Impressive for a telecom utility. Still sporting 6.3% dividend yield. For 2023 FCF is $18.7 B.
Full-year 2023 capital expenditures were $18.8 billion, down from $23.1 billion in 2022 and capex for 2024 is expected to be around ($17-$17.5). VZ expects $1 ~$1.5 B reduction in capex. Expect most of this to go towards retiring debt.
Still a solid dividend and improving fundamentals.
Raising cashflow, EPS, historically VZ has increased dividend, and the interest rates are dropping are a perfect scenario for this stock. It doesn’t have to get back to previous highs or 50+, even if it moves up few $$, given its 6% dividend yield you can get solid returns.
Falling interest rates should have good return potential. Utilities – especially electric utilities – are often mentioned. Increasing electric demand for ai data centers and EVs should help.
Fidelity is also promoting bond etfs.
Others point out that the federal deficit should mean lots of bonds and might limit interest rate decreases.
In fact, yesterday, in BAC note on inflows, utilities are having record inflows, and record high valuation. Remember this is a high yielding not high growth sector. Requires high capital. Utilities has a second or third derivative play on AI Is overrated. I understand the electricity demand for AI, but what is not clear is how it is going to be addressed. If nuclear emerges, because AI would require constant base load, then most of these utilities are not going to benefit.
A relatively better sector is REIT’s. Under owned, better yield, and when the interest rates fall, they benefit from cap rate going down, and their interest cost goes down. Most REIT’s have hedged their interest rate exposure or have very little variable rate debt or immediate maturity. SO I am not expecting much relief on the interest rates. However, valuation should help and generally RETI’s are in better shape.
Increasing demand does imply growth. Large base could make percentage small.
Whether utility benefits may depend on choices. Three Mile Island w Microsoft will benefit utility as they shut down but did not sell plant. Surplus power from solar or wind will probably be delivered by grid owned by utility.
Of course ai companies building their own nuclear plant or wind farm and their own grid is very possible. Or they contract with private companies.
Lots of variables. We will have to see how it all happens.
Certainly. Most nuclear power is not going to help existing players except few. Also, hyperscaler’s are talking about setting up mini nuclear plants near the AI DC’s and they are going to have some sort of stake in them. So how much benefit is going to flow to the industry needs to be seen. Most feel, the utilities are not efficient and have bloated cost structure (which is partially true due to public rate decisions), and want to directly control the operations. Also, if they are closer to the DC then not much in transmission or grid charges. Separately, all of this requires huge capital.
The reason I am stating this is, the sector as a whole rallied 50% and some names even higher. I am wondering whether XLU or utilities are front running the news and reality may bring them back. If they mean-revert, even a 30% drop will require a decade to recoup the losses.
I think we know maintaining the residential grid is expensive. For years AT&T subsidized local phone companies with profits from long distance calling. There seems to be a trend in cable to drop the physical connections and use cell towers if you can. Phone company is dropping twisted pair copper connections and going digital.
Yes, visualize a data center with its own power source. Its only connection with the world is likely to be fiber. Possibly very little overhead.
I would look at LNG or natural gas. US has plenty of it, drilling is something that keeps GOP happy and relatively clean burning means LNG is preferable compared to coal (democratic constituency) and nuclear is going to face serious NIMBY and going to take longer gestation period.
Yes, short term it should be fine. But natural gas is a fossil fuel. Its days are numbered (but probably will be around long enough for anyone living now).
