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Shares of telecommunications giant Verizon (NYSE: VZ ) are known more for their stability than their ability to produce out-sized returns for investors. Indeed, over the past decade, you'd be hard-pressed to find any time frame in which Verizon stock out-performed the market.
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Over the past 10 years, Verizon is up just 100%, while the S&P 500 is up 215%. Over the past five years, Verizon stock is up 17% to the market's 50% gain. And, in 2019, it is essentially flat, while the market is up 12%.
If Verizon stock consistently under-performs the market, then why would investors ever own the stock? One word: stability.
A Closer Look at Verizon Stock
When it comes to stability, Verizon stock is second to none. The stock's beta over the past decade has consistently hovered between 0 and 0.8, with the average beta coming out around 0.4. Broadly, that means that Verizon is significantly less sensitive to market volatility than your average stock.
Further, Verizon stock's dividend yield over the past decade has consistently hovered north of 4%, while the S&P 500 yield has averaged around 2%.
In other words, at any point in time, you own Verizon stock because it's a low-risk asset with a sustainable, high yield. This will remain true for the foreseeable future. But, over the next few years, the stock will get an additional lift from a highly underrated catalyst: commercial 5G roll-out.
This catalyst on top of the stock's inherent stability will enable shares of Verizon to work over the next few years. As such, if you're looking for a low risk, high yield play into 2020/21, VZ could be a solid choice.
Verizon Is A Symbol of Stability
In the big picture, Verizon's business lends itself to an enormous amount of operational and financial stability, which is reflected in the stock's low volatility and big yield. Verizon is the leader in U.S. wireless coverage. For all intents and purpose, wireless coverage is a utility that most Americans cannot go without, and dependence on wireless coverage is only growing.
Consumers are increasingly addicted to their smartphones, with the average U.S. adult spending more than three and a half hours on their smartphone everyday. Back in 2013, that figure stood at barely over two hours. Thus, mobile phone engagement is rising, as is wireless coverage dependency.
Verizon is the leader in the U.S. wireless coverage market, thereby implying that millions and millions of Americans have a huge dependency on what Verizon sells. This dependency lends itself to stable demand, which leads to stable revenues. Competitive factors can weigh on margins. But, overall, the competitive environment is rather static, so margins are largely stable, too.
In other words, from head to toe, Verizon's business is stable. This stability is reflected in the stock.
Verizon stock is very low volatility. Over the past decade, the stock has dropped into bear market territory (20% or more off recent highs) only once, while market darlings like Amazon (NASDAQ: AMZN ) and Netflix (NASDAQ: NFLX ) have each done it more than five times.
The stock's beta is consistently very low, averaging around 0.4 over the past ten years. And, during major sell-offs, Verizon tends to hold up better than the market. Example: during the late 2018 market sell-off which dragged the S&P 500 narrowly into bear market territory, VZ stock fell just 12% off its recent highs.
Further, Verizon stock compensates investors for the lack of capital gains with a consistently big yield. Over the past decade, Verizon's yield has consistently been north of 4%. Over the past five years, the yield has averaged around 4.5%. Thus, while investors aren't seeing huge returns in the stock, they are seeing a big yield come in every year.
5G Is A Big Catalyst
Owing to its operational and financial stability, Verizon should work over the next few years. But, the stock should work especially well because of the 5G catalyst.
Long story short, 5G is the next big thing in the wireless coverage market. It's more than just a step up from current coverage standards. It's a huge leap up; 5G wireless speeds are roughly 1,000-times faster than current wireless speeds. Delays are significantly shorter, too.
This huge leap up is happening at a time when internet coverage is becoming more pervasive across a great number of devices and industries. Think smartwatches. Smart cars. Data centers. Cloud services. AI.
In other words, 5G coverage is a huge leap up in internet connectivity at a time when the world really needs that huge leap up. The implication for Verizon? Demand should be robust. That should lead to healthy revenue growth. Further, if Verizon can differentiate itself in the 5G market, that will lessen competitive pricing pressures.
With those pressures eased, margins could move higher. Thus, profit growth could actually benefit from a double tailwind over the next few years. If so, VZ stock should head materially higher. The forward earnings multiple on the stock is below the five-year standard. As such, both profit growth and multiple expansion could provide a nice lift to Verizon into 2020/21. Meanwhile, the yield remains around 4%, so investors are getting paid to be patient.
Overall, Verizon stock looks good here. The valuation is reasonable. The growth trajectory is positioned to improve. And, importantly, the stock's historical stability will persist.
Bottom Line on VZ Stock
In a market where hyper-growth tech stocks are doubling in a matter of months, it is sometimes easy to forget the slow-and-steady stable utility stocks like Verizon. But, investors should start remembering VZ stock right about now.
This stock is heading into its biggest catalyst in recent memory, against the backdrop of a below-average valuation and a 4%-plus yield. That combination should make VZ stock work over the next few years.
As of this writing, Luke Lango was long AMZN and NFLX.
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