Shares of telecom giant Verizon (NYSE: VZ) have been on the rise. At the time of writing, the stock is up about 14% over the past twelve months. While a rising share price is welcome, perhaps the most attractive aspect of the stock is that it is an income investment.
Verizon’s dividend serves as a reliable source of passive income, given its eighteen consecutive years of increases. It also has an impressive forward dividend yield of 6.5% as of November 7.
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Given these positives, it looks like Verizon stock is worth buying in the long run. But there is a wrinkle to consider. In September, Verizon announced the upcoming acquisition of Frontier Communications parent. Here’s how the Frontier purchase could impact buying Verizon stock.
Verizon’s move to acquire Frontier is part of its push to capture customers in the growing fiber-optic internet market. The 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 optic network. Frontier offers fiber internet service in 25 states, which would increase 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 due to increasing adoption of its fiber offerings. Meanwhile, Verizon’s fiber product under the Fios brand produced $3.2 billion in revenue in the third quarter, essentially flat from the previous year.
Once the Frontier acquisition is completed, which is expected to take 18 months, Verizon’s Fios revenues will be boosted by the addition of Frontier. The acquisition makes sense in terms of strengthening Verizon’s broadband business, but there are downsides.
The Frontier purchase will be an all-cash transaction valued at $20 billion. According to media reports, Verizon appears to be taking on debt to finance the deal. The telecom sector already has a hefty $126.4 billion in unsecured debt as of the third quarter.
In addition, Frontier has accumulated more than $11 billion in debt. The company has stated: “We have significant indebtedness, and it is possible that we may incur significantly more indebtedness in the future. Such debt and debt service obligations could adversely affect us.”
In addition, Verizon will need to make further capital expenditures as it continues to expand its fiber network. Frontier alone plans to reach ten million homes by 2026, up from about seven million today.
All of this means Verizon must carefully balance debt payments, investments in the business, and dividend payments. Otherwise, the series of dividend increases could be in jeopardy.
The telecom sector’s free cash flow (FCF) is an important indicator of its ability to meet these obligations. At the end of the third quarter, Verizon’s year-to-date free cash flow was $14.5 billion, down slightly from 2023’s $14.6 billion.
When it comes to FCF, the Frontier acquisition won’t help. Frontier ended the third quarter with negative free cash flow of $81 million. In fact, Frontier is not a profitable company. The company generated a net loss of $82 million in the third quarter.
Verizon sees fiber as a key growth area for the company. If it can turn Frontier’s business into a profitable business, the deal could be a good move in the long run. That’s because customers who adopt both Verizon’s mobile and Internet services “demonstrate greater loyalty” and are less likely to leave the carrier, according to the company.
Certainly, sales of Fios could use a boost. The $3.2 billion is just a small portion of Verizon’s $33.3 billion in third-quarter revenue. Most of the telecom sector’s revenue comes from mobile wireless service. In this segment, third-quarter revenue rose 3% year-over-year to $19.8 billion.
If fiber combined with mobile services can help the latter’s revenue, that will be positive for investors. This combined with Verizon’s 18 years of dividend increases and reliable FCF generation makes it a valuable income stock to consider as a long-term investment.
Which brings us to the question of whether now is the time to buy. One factor to consider is the price-to-earnings (P/E) ratio, which is used to assess stock valuation. The price-to-earnings ratio indicates how much investors are willing to pay for a dollar of income.
The price-earnings ratio of the telecom sector is currently higher than it has been in years. So there is no rush to grab shares now. Verizon stock has retreated from a 52-week high of $45.36 reached in September. Wait for the stock to fall further before deciding to buy because of its robust dividend.
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Robert Izquierdo holds positions at Verizon Communications. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
Is Verizon Stock a Buy Now? was originally published by The Motley Fool
