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U.S. telecom giant Verizon (VZ) is a favorite among dividend stocks but has taken a hit following a mixed Q2 earnings report. The investment thesis for Verizon centers on its efforts to reduce leverage, boost free cash flows, and support its dividends, with only slight progress made in Q2. Despite slow progress and recent declines in investor confidence due to muted top-line growth, I still believe Verizon’s dividend remains attractive. I’m bullish on the stock, as Verizon continues to be a compelling defensive pick to own.
Verizon’s Q2 Earnings: Mixed Results and Tepid Response
In a nutshell, Verizon reported mixed Q2 earnings: a top-line miss, bottom-line results in line with the consensus, better-than-expected operating metrics, and unchanged P&L guidance. This combination ultimately disappointed investors, leading to a 6% drop in the stock price, though it has since experienced a brief recovery.
Earnings came in at $1.15 per share on an adjusted basis, but this meant another quarter of year-over-year declines in EPS (see below). In fact, Verizon hasn’t been able to grow its bottom line year-over-year since Q2 2022, facing various headwinds in the telecom industry. This is why the stock has significantly underperformed the S&P 500 (SPX) in recent years.
What really disappointed investors this time was the revenue. Verizon posted revenue of $32.80 billion, missing the market’s $33.05 billion estimate and showing only a modest 0.6% year-over-year increase.
The drop is largely due to a decrease in Wireless equipment revenues—smartphones, tablets, and routers—which fell from $5.3 billion in the same quarter last year to $5 billion. According to management, lower promotions and a 13% year-over-year decline in phone upgrades have taken a toll. However, Service revenue, which is crucial due to its higher margins and recurring nature, grew at 3.5%.
Another key point is that Verizon added 148,000 new post-paid phone customers and 391,000 new broadband customers this quarter. Finally, the Fixed Wireless Access (FWA) business segment is on track to reach $2 billion in annual revenue. Nonetheless, Verizon still isn’t seeing significant overall growth.
Net Debt, Cash Flow, and Dividends: What Really Matters
Verizon’s investment thesis heavily relies on its ability to reward shareholders through dividends. Therefore, investors closely monitor the company’s management of leverage and improvement in cash flows.
Verizon’s total debt stands at $149.3 billion, which has increased by 40% over the past five years due to its extensive 5G expansion. However, net unsecured debt fell to $122.8 billion in Q2, about $4 billion less than at the start of 2024. Leverage (net debt/EBITDA) also improved slightly to 2.5x, down from 2.6x at the beginning of the year. Despite these modest improvements, interest expenses jumped to $1.7 billion from under $1.3 billion the previous year, reflecting the adverse macroeconomic conditions.