Investors Should Still Avoid Verizon Stock Despite Rising Earnings. Here's Why.

Globe and Mail

3 days ago

Key Points
Verizon's already massive debt has risen further this year.
Verizon now has to balance expectations of dividend increases against its generous yield.
Reducing or suspending its dividend to focus on debt reduction could help Verizon stock longer-term.
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On the surface, Verizon Communications (NYSE: VZ) released a solid earnings report for the second quarter of 2025. The company benefited from rising revenue, earnings, and free cash flow, and a raised outlook bodes well for the communications stock 's progress.
What the report did not do is alleviate concerns about one area of the balance sheet where the company has struggled for years. That strongly indicates that without one painful but critical move, Verizon stock will likely continue to struggle.
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Verizon's ongoing concern
Verizon's situation worsened in one key area: total debt.
As of the midpoint of 2025, Verizon's total debt now stands at almost $146 billion.
This is up from $144 billion at the end of last year as its unsecured debt, which typically carries higher interest rates, rose by $2 billion. However, when factoring in the total equity, or book value, of $104 billion, it becomes apparent how much strain these obligations place on the balance sheet.
Admittedly, Verizon and its main competitors, AT&T and T-Mobile, have also depended heavily on debt to finance the construction and maintenance of their telecom networks.
Verizon's debt was more manageable until 2021, when the company spent $52.9 billion to acquire C-band spectrum. Spectrum is a sort of "RF real estate" that grants Verizon the exclusive right to use a specific frequency in a geographic area. This was prime spectrum, which enabled many of its wireless service offerings.
So why is the debt an issue?
Indeed, the debt level itself is not necessarily an issue. Over the previous 12 months, Verizon spent $6.6 billion in interest expenses. This amounts to a slightly more than 4% in interest costs when factoring in the $154 billion in total debt, a relatively low rate.
Nonetheless, interest rates have risen since 2021. Even though only around $2 billion of Verizon's debt is due this year, it will likely have to refinance that debt at a higher interest rate, meaning investors should assume that the cost will rise over time if its financial situation remains the same.
Another factor is its dividend sustainability. Verizon has built an 18-year streak of payout hikes and likely wants to avoid the fate of AT&T, whose stock suffered for years after it abandoned a 35-year record of annual dividend increases in 2022.
Verizon's dividend returns are also significantly above those of its peers. At $2.71 per share, its dividend yield is 6.4%. That is more than 5 times the S&P 500 average of 1.2%. It is also significantly higher than the yields of AT&T and T-Mobile, which return 4.1% and 1.4%, respectively.
That dividend cost Verizon nearly $11.4 billion over the last 12 months. In a sense, it can cover this cost since it generated just over $20.1 billion in free cash flow during the same period. Still, with a dividend cut, Verizon could also use some or all of that $11.4 billion to retire debt.
So far, Verizon has not done that, as its high yield likely makes the stock a draw for income investors. Also, if AT&T and other stocks are any indication, a dividend cut could lead to stock price declines in the near term.
Nonetheless, lower debt levels would help stabilize the balance sheet. Over time, this could make the stock more attractive, as it has underperformed the market despite trading at a P/E ratio of 10.
Income investors would suffer from both lower dividend income and falling stock prices in the near term. Conversely, the low P/E ratio may limit the downside. The improved finances could draw investors to the stock, possibly compensating for the lost dividend income in the long run.
Making sense of Verizon stock
Even with the positive earnings report, Verizon stock is likely a hold for now.
While its dividend is generous, its high cost to the company and heavy debt burdens likely make the dividend's current trajectory unsustainable. That will lead to more struggles for Verizon stock if it lowers the dividend to better service its debt.
However, investors should also note that AT&T remains a solid dividend stock despite slashing the payout. That indicates that as investors adjust to a new reality, rising earnings, a stronger balance sheet, and a low P/E ratio could make Verizon stock an attractive holding if it works harder to lower reduce its debt.
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