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Can You Hear Me Now?

October 24, 2018

Verizon (VZ), one of the leading members of the new communication services sector, turned in its earnings this week. Verizon is the main competitor for AT&T (T), which I also wrote on this week, both for wireless and other communications and content business.

VZ managed to turn in its sixth straight quarter of rising customer gains. It added an overall 515,000 new subscribers, which was well above the guidance of 468,000. Revenue was up 2.81%, and more importantly, operating margins continued to be fat at 21.80%, which enabled a return on its considerable assets of 12.40% and a return on equity of a whopping 79.30%.

The key for the company has been to focus on its network and its wireless offerings rather than on bigger content. But it does continue to offer some of its own content to its subscribers and under contract to other providers.

The big push for the company is its roll-out of its fifth-generation wireless (5G) infrastructure. This is a big capital spend, which it projects will capitalize on the big wave of commercial and consumer subscriber growth.

CEO Hans Vestberg hails from 5G equipment leader Ericsson (ERIC), so he’s well-versed on the technology and the needs of the company’s build-out and roll-out of 5G.

But in the meantime, the company is a dividend champ of the telecom market. Verizon’s dividend yield, at 4.20%, pays a bit less than AT&T’s at 6.54%, yet Verizon continues to bolster the payout by an average of 2.72% a year over the past five years.

The payout is securely defended, with a payout ratio of only 31.60%, which leaves lots of cash to fund the capital spending for 5G.

And the market likes what it hears. The shares not only held up during the October market jolt; they have soared. The shares have delivered a return of 7.77% for the month to date compared to the loss of the general S&P 500 Index of 6.78% and the more narrow S&P Telecom Index’s loss of 5.95%.

This continues the long-term performance story, with a long-term return of 302.55% beating the S&P 500 and the telecom index by wide margins. This equates to an  average equivalent total return (price gains and dividends) of 14.93% per year.

Dividends pay—and Verizon’s dividends pay even more so.