Stable Dividend Puts Verizon Stock (VZ) on Bullish Growth Trajectory

Business Insider

16-07-2025

It's been some time since Verizon Communications' (VZ) stock has put in a strong performance, and its generous dividend is what keeps it from looking even worse.
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For example, this year alone, VZ is up just 3% (around 9% when you factor in dividends), barely edging out the broader market. However, looking longer term, over the past three years, Verizon has declined by about 17%, which is nearly offset by dividends, during a period when the broader market delivered gains of more than 70%.
As the U.S. telco sector shows clear signs of saturation and struggles with pricing power, the outlook remains bleak, not disastrous. However, it signals that Verizon is unlikely to accelerate revenue growth (especially above inflation) and will need to maintain tight cost control to preserve margins and continue generating strong cash flows.
For now, an attractive and safe dividend yield, along with historically discounted valuations, keeps the investment case appealing. I still rate VZ as a Buy —especially if Treasury yields move lower, which would make the income angle even more compelling.
With Q2 earnings set to be published on July 21st, I believe that any signs of ARPU stabilization and stronger pricing power—plus an earnings beat across the board—could be enough to help the stock move more consistently higher in the second half of the year.
Verizon's Defensive Income Thesis
Assuming that many investors defend the thesis of investing in Verizon as a defensive income payer with a mature business model, I believe it's crucial to highlight a few fundamentals that keep the core of this thesis healthy.
The first point worth focusing on is real growth (inflation-adjusted) and profit quality (margins and cost control) as the backbone of the company's operational excellence. For example, in Q1 2025, Verizon's total revenues grew by 1.5%, while COGS increased by 1.4% over the same period. Considering that the latest U.S. Consumer Price Index (CPI) stands at 2.4%, this means revenue growth is actually running below inflation, implying a real drop in purchasing power, especially when factoring in a Q1 ARPU of $31.92, down 1.1% year-over-year. When adjusted for inflation, this suggests a real decline in Wireless retail core prepaid ARPU of around 3.5%.
On the other hand, COGS growing below inflation has helped keep gross margins stable, at precisely 61% in both 1Q25 and 1Q24.
So, at a minimum, for the income thesis to hold up, Verizon's solid base remains intact, supported by disciplined cost management and resilient margins, which in turn secure a healthy and attractive dividend yield of 6.5%. However, limited real growth and a declining ARPU highlight competitive pressure and weak pricing power, underscoring that the growth angle is more fragile, especially given the ongoing need for heavy infrastructure investment just to stay competitive.
Free Cash Flow and Dividends Indicate Strong Finish in 2025
On the one hand, the trend for the year so far, given pricing headwinds and cost control measures, suggests stable operating cash flow, which should also translate to stable free cash flow, although not necessarily growing.
However, Verizon's 2025 annual guidance indicates a midpoint that implies approximately 6% growth in CapEx—around $18 billion—while free cash flow is expected to increase by about 12.5% year-over-year, reaching the same $18 billion at the midpoint. What's interesting here is that revenue and EBITDA growth, at 2.4% and 2.75%, respectively, are significantly lower than the projected FCF growth, which suggests improved operational efficiency or better working capital management.
This free cash flow growth (~12.5%) outpacing revenue and EBITDA growth hints at ongoing efficiencies driven by Verizon's well-established practices, like optimizing receivables cycles through prepaid plans and automatic debit, and managing supplier payments with longer terms to smooth out cash flow seasonality.
Such robust cash flows support likely dividend payouts consistent with the company's historical payout ratio of about 58%, which today translates to a very attractive and, in my view, safe yield of around 6.5%. This is well above the current 10-year bond yields, below the trailing twelve months FCF yield of approximately 9.7%, and still leaves roughly 42% of free cash flow available for capital expenditures and debt reduction.
What Verizon's Q2 Means for Investors
If Verizon's business remains rock solid in terms of cash flow, why has the stock been drifting sideways or underperforming? In my view, the U.S. wireless market is clearly saturated, with no secular growth story, as Verizon's recent results show, revenues and ARPU are growing below inflation.
Verizon also carries a high debt load, with about 63% of its capital structure financed by debt. While this is typical for a telco, it does limit flexibility in tighter credit conditions, such as those we currently have with higher interest rates. These two factors explain some of the market's skepticism around Verizon's outlook.
Combine the lack of clear catalysts with sluggish growth and rising sector risks—from intense competition to disruptive technologies like Starlink—and Verizon could face additional pressure on pricing power over time.
Still, looking ahead to Q2, expectations are for $33.7 billion in revenue (up 2.6% year-over-year) and a 3.4% EPS increase if Verizon beats the $1.19 consensus. Positive surprises—especially if ARPU stabilizes or declines less than anticipated—could spark renewed investor optimism and upside potential.
Trading at a forward EV/EBITDA of around 11x—roughly 30% below the industry average and 6.7% below Verizon's own five-year historical average—Verizon could become a 6.5% dividend yield refuge if Treasury yields decline amid a slowing economy, attracting income-focused investors who value its historically compressed valuation multiples.
Is Verizon a Buy, Hold, or Sell?
Wall Street experts are currently split on Verizon's outlook. Over the past three months, of the 15 analysts covering the stock, seven are bullish and the other eight are neutral. Not a single analyst is currently bearish. Meanwhile, VZ's average stock price target stands at $47.92, implying about a 15% upside from the current share price.
Why Verizon's Yield Still Commands Attention
I believe Verizon remains an excellent choice for income-focused investors, offering a high, healthy, and stable yield that should stay steady at least throughout this year. Although long-term concerns about pricing power and disruption persist, much of that skepticism appears to be already priced into historically discounted valuations.
Verizon enters Q2 in a relatively stable position, and I don't expect any major surprises, especially not negative ones. That said, signs of ARPU stabilization could boost confidence and help push growth toward the higher end of the company's annual guidance. For now, I see VZ as a Buy.