Has The Easy Money Been Made In Verizon Stock?

  • The 6-month rally in Verizon stock seems to have cooled off after analysts called out several telecom stocks.
  • The rally appears to have been mainly fueled by ongoing market uncertainties.
  • Although the market appears to have stabilized somewhat, trading is still quite choppy which can help Verizon stock continue making gains.

Verizon (NYSE:VZ) stock is down 4% after MoffettNathanson downgraded the stock along with AT&T (NYSE:T) citing slowing smartphone sales and stabilizing ARPUs.

"Telecom stocks have enjoyed an almost pitch-perfect backdrop over the past six months, with a strong dollar, falling interest rates, and falling risk appetites,"

"In the early part of the year, Verizon and AT&T rose sharply even as the market sold off. Perhaps more surprisingly, the Telecoms have continued to perform well even as the market has rebounded from its February trough as risk appetites expanded, tracking lower expectations for further rate hikes."

Verizon vs. AT&T vs. Communications Sector YTD Share Returns

VZ-1

Source: CNN Money

Verizon and AT&T have vastly outperformed the S&P 500 which is up a mere three-quarters of a percentage point year-to-date. VZ stock is up 12.89% while T stock is up 12.1% YTD. But from the chart above you can see that this trend is not unique to the two stocks but rather the communications sector, in general, has performed well YTD. Nevertheless, that performance looks remarkable when you consider that these two stocks have badly lagged the market over a five-year timeframe. Verizon stock has gained 38% over the past 5 years compared to 26% by AT&T and 55.7% by the S&P 500.

But of course, investors know there is something more to these two stocks than what meets the eye: high dividend yields. Verizon stock sports a dividend yield of 4.33% while AT&T's dividend yield is 4.95%. Had an investor bought Verizon stock five years ago and re-invested all the dividends, they would be sitting on a return of 68.4% while reinvesting AT&T dividends over a similar timeframe would yield a return of 58.5%.

The S&P 500 currently sports a dividend yield of 2.1%. Reinvesting dividends at that yield would compound returns by the market to 71.3% which implies that the two stocks have underperformed the market on both counts. This is hardly surprising given the 6-year mega-bull market that ended in 2015.

Device sales have been slowing in the U.S. over the past couple of years. There is a possibility that the market has punished Verizon and AT&T more than they deserve based on these trends. Smartphone penetration in the U.S. stands at 65% while mobile phone penetration is at 91%. For smartphone sales to continue growing in this saturated market it will take convincing diehard feature phone users to switch to a smartphone so smartphone sales growth is likely to remain muted.

Verizon did away with selling subsidized iPhones last year which might negatively impact sales. But maybe its customers don't really need them anyway. The company's customer base has held up quite well over the years without the company engaging in aggressive price cuts on its services. Moreover Verizon's mobile video strategy has been going well.

Now regarding the question of whether the easy money has been made in Verizon stock, it appears as if the recent rally by the stock has more to do with the qualities of the stock as a good defensive play. In a choppy market such as the one we saw early in the year, investor risk appetite diminishes considerably and investors tend to flock to ''safe haven'' stocks such as Verizon and AT&T. These are stocks of stodgy slow-growth companies without much threat to their business models. 10-year treasury yield rates currently sit at 1.79%. Although there are still lingering fears that the Fed will continue raising rates in the future, the hikes are unlikely to be aggressive enough to rival high dividend yields by telecom players.

Investor Takeaway

Despite the recent market rally, there is still a lot of uncertainty whether this is just a lull before another storm. It's therefore quite likely that the defensive qualities of a stock like Verizon will keep investors interested in the stock. Verizon stock is likely to continue outperforming AT&T stock because the company has comparatively better fundamentals. As long as the current market uncertainties last and the Fed does not hike rates too aggressively, Verizon stock is likely to continue making healthy gains.

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