As my previous investment thesis has highlighted, Verizon Communications (VZ) doesn’t support a lot of upside to the stock when the dividend yield touches 4%. The stock is back up to $57 where the dividend yield dips to 4.2%, capping any likely gains in the short term, while 5G offers the potential home-run the stock needs.

Image Source: Verizon website

4% Dividend Yield

Due to a competitive domestic wireless market, Verizon has been unable to grow earnings in any meaningful way lately. For this reason, the dividend hikes are rather meager.

For the last decade, Verizon hasn’t seen the dividend tick below 4% for any meaningful time period. With an annual payout of $2.41 per share, the dividend yield hits 4.0% at $60.25.

ChartData by YCharts

A 4% dividend yield just doesn’t support the risk in the sector. The total return for Verizon since the yield originally dipped into the 4% range about five years has far trailed the S&P 500 index. Verizon has generated a 46% total return while the S&P 500 is up at 64%.

ChartData by YCharts

Another part of the problem is that Verizon remains far too expensive in comparison to AT&T (T). My previous research made it clear that the equation would need to change before Verizon was able to rally and make it below the 4% dividend yield.

5G Push

As the world pushes forward on mobile 5G development, Verizon stands to benefit from a fast adoption in the U.S. The lingering T-Mobile (TMUS) attempt to purchase Sprint (S) might end up hindering its 5G network whether the merger is approved or not. With 10 state attorney generals suing to block the merger and concerns from the Department of Justice, Verizon stands to claim an early lead in 5G.

In the course of about eight months, Ericsson predicts there will be 1.9 billion mobile 5G subscriptions globally by the end of 2024, up from the 1.5 billion subscriptions by 2024 that it had predicted in its November 2018 Mobility Report. The company attributed the 400 million subscription increase to better availability of devices and networks around the globe.

Overall, 5G uptake will be fastest in North America. Ericsson predicts 63% of mobile subscriptions in the region will be 5G by 2024.

Source: Ericsson Mobility report

So based on data from Ericsson, the North American market led by the U.S. is positioned to be predominantly 5G by 2024. T-Mobile has already made it clear that the company needs Sprint in order to effectively compete in the sector.

The company provided this chart in a document to the FCC to support the merger. According to its data, the individual T-Mobile and Sprint networks will have vastly lower 5G user experiences with separate networks. T-Mobile can cover a wider population with speeds of 100 to 200 Mbps while Sprint can cover about half the population with network speeds of 300 to 400 Mbps. A combined network would cover 50% of the population with speeds above 500 Mbps.

The problem for the new T-Mobile is that several government agencies don’t want the merger to happen.

As the chart above highlights, the merger would make the new T-Mobile a formidable competitor down the road in the 5G market. Verizon would likely benefit from a finalized merger in the short term due to less price competition without Sprint in the wireless market, but the company could present a problem long term.

As research supports a more robust 5G market by 2024, the best outcome for Verizon is a regulatory environment that delays and blocks the creation of a new T-Mobile. Such a move could lead Verizon as the clear 5G leader with AT&T sidetracked with video streaming services.

The company recently launched 5G services in two cities with additional plans for 30 U.S. cities this year. The company and the market have limited expectations for material revenues until 2021.

The Ericsson report could help Verizon boost revenues beyond the expectations for limited revenue growth. Analysts don’t expect revenues topping 3% growth in any year through 2023.

Source: Seeking Alpha earnings estimates

Takeaway

The key investor takeaway is that Verizon shareholders are likely looking at a couple more years of limited total returns. The only real hope for outside gains occurs in 2021 as mobile 5G revenues ramp up beyond expectations in part due to T-Mobile and Sprint not being able to offer a robust solution and AT&T too focused on battling the content wars.

Investors have no reason to rush into Verizon until 2021 approaches or the stock drops toward the lower $50s and the dividend yield reaches towards 5%.

Disclosure: I am/we are long T. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

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2019-06-13