Can 5G Provide a Boost to Verizon Stock?
September 26, 2018
Who doesn’t want faster internet speed?
Whether on your phone, tablet, laptop or television, speed means easier and quicker access to data and email, as well as quicker Instagram photos and, of course, faster cat videos.
Who doesn’t remember when we went from the original GSM wireless phones to 2G? All of a sudden — well, gradually, with lots of dead zones, particularly in New York City and San Francisco — Blackberries and Palms were able to get email on the fly.
Then came the whiz-bang 3G, which brought speed to a more useful level, including just enough bandwidth to send attachments with email, including Microsoft’s (NASDAQ:MSFT) Word and Excel files. This was great stuff for folks like me who operate out of the office and often travel for business. And while it wasn’t that fast, when I found myself outside of the U.S., the drop down to 2G was a rude awakening.
But now, we’ve had 4G and LTE (Long-Term Evolution) for some time. It works pretty well and has spread around much of the U.S. and globe — except for at my office in Rockville, Maryland, which seems to be a permanent dead zone for my Blackberry KEYone device made by TCL Electronics Holdings (OTC:TCLHF).
Now comes 5G, which stands for fifth generation. It promises to rival high-speed cable and fiber-optic connections for speed and bandwidth. But while everyone is waiting for this, it is not yet even standardized in terms of compatibility with chip and equipment makers, telecom operators, automakers, governments and supernational organizations such as the ITU (International Telecommunications Union, part of the United Nations), which are all still debating on what’s going to be what for 5G.
Verizon Stock and the Advent of 5G
But, let’s not get ahead of the science and standards. Verizon (NYSE:VZ) is rolling out 5G in a handful of urban markets, including Houston, Indianapolis, Los Angeles and Sacramento, on Oct. 1.
This is a big and necessary bet by Verizon stock to not only keep its current wireless customers on board, but to grow its subscriber and device number subscriptions. And it also presents a big new market for Verizon — cable cutters.
Verizon stock, of course, already has its own cable offerings via its fiber optic Fios product as well as DSL (Digital Subscriber Line) data feeds. But Fios got stalled out on cost and municipal government medling that also doomed AT&T’s (NYSE:T) fiber projects. And its DSL isn’t an option unless you have no other choice than dial-up speeds.
Right now, there are some 90 million broadband data customer households in the U.S. And out of those, I would guess that many, like me, are not fans of their providers — including Comcast (NASDAQ:CMCSA) in my Alexandria, Virginia, location or Charter Communications (NASDAQ:CHTR) in Saint Louis.
So, Verizon stock has a lot of potential market to conquer with 5G that, if working properly, has the potential to deliver higher speeds than most cable providers.
But to get 5G to work, you need many, many antennae. And in the U.S., the CTIA (Cellular Telecommunications Industry Association) estimates that some 300,000 initial locations of antennae are needed in just the first rollout over the coming few years. In the U.S., there are only 30,000 initially installed.
And this means lots and lots of capital spending. And in addition, it also means lots of haggling with municipal governments for rights to place each antenna on utility and light polls. Right now, cities around the country are demanding as much as $5,100 per year for the right to use some poles in New York City, and other cities — even small fry like Lincoln, Nebraska — are still demanding thousands of dollars per pole per year.
That was solved today thanks to the FCC (Federal Communications Commission) headed by Chairman, Ajit Pai who used to represent Verizon in government affairs. The FCC is set to vote to cap rates for pole use to the cost of using the right of way, which it estimates to be an average of $270 per year. And to speed up 5G rollout — citing national security needs — it will also vote to cap approval times from as much as 150 days or more to 60 days.
Bad news for politicos seeking to soak VZ for cash — good news for customers and Verizon stock shareholders.
But there still are the equipment costs. IHS Markit (NASDAQ:INFO), a London-based consultancy business, estimates that 5G will cost some $200 billion annually for phone companies, suppliers and equipment companies to get 5G on the airwaves and keeping it there.
VZ Stock Is Worth a Look
This comes as Verizon has been trying to control costs — including capital and fixed assets, which have been steadily cut over the past several quarters. In addition, Verizon announced yesterday that it is trying to cut workforce from the top down, offering buyouts of several weeks pay for each year worked.
Meanwhile revenues haven’t been setting records, with the trailing year seeing growth pretty near nil. But over the past quarter, it did manage a bit of a pick-up with a gain of 5.4%, showing some potential for growth.
But the telecom utility business is a good cash cow to have and Verizon stock is working to keep the margins on the fat side. Operating margins are at 21.8% which generates a nice return on all of those hard to replicate assets at 12%. And shareholders are still served with a return on their equity at 80.2%.
And the dividend is ample for a big-name common stock in the U.S. market at 4.5%, which has been rising on average by 2.76% per year over the past five years.
But 5G is going to cost the company and be a draw on cash. That should be received by the credit markets, as it has a comfortable debt level of 45.5% of assets. And with Moody’s giving Verizon a rating of Baa1 and S&P giving a BBB+, it should be able to tap the bond market, which has been eager for big U.S. names around the globe. This is evidenced by the successful many-billion-dollar placements recently by rival AT&T to pay for its deal for Time Warner.
5G may well be the future in some form. But it won’t be coming as quickly as some are hyping.
And for VZ shareholders, it should be viewed as just part of the company’s evolution and development. And in turn, Verizon stock should be viewed as a good dividend payer with measured stock price appreciation that, over the past 10 years, has generated an average annual equivalent total return of 11.39% which has outperformed its peers in the S&P 500 Communications Services Index by a wide margin while staying close to the performance of the general S&P 500 Index.
Neil George is the editor for Profitable Investing and by company policy does not have any current holdings in the securities mentioned above.