A lot of UK investors still focus most of their time and attention on the FTSE 100 and FTSE 250. Yet, across the pond, the US can offer some interesting investment options.
Not everything is tech stocks that some dismiss as being overvalued. Rather, the Dow Jones contains some undervalued gems. Here’s one I don’t believe is on many radars.
I’m talking about Verizon Communications (NYSE:VZ). The stock’s up 15% over the past year, but I still don’t think it’s getting the attention it deserves.
Let’s rewind a little. Verizon’s one of the largest telecommunications companies in the world and provides the infrastructure that keeps people and businesses connected every day.
The company makes money in a few key ways. Postpaid wireless plans are a big area, but it has a growing broadband and internet business, along with a business and enterprise segment.
Operations are going well. The latest results from January showed 3.5m wireless retail postpaid phone additions, up 13% versus the previous year. Overall revenue grew 2%. For income investors, the 5.82% dividend yield has also acted as a powerful magnet, particularly in volatile markets where reliable income is prized.
These are all positive signs, even before I get to the outlook. But I think the company has been overlooked for a few reasons. To begin with, it’s not a tech stock in the same way Apple or Amazon are. Therefore, I think some allocate cash to a small number of mega-cap tech shares to the detriment of Verizon.
Further, some feel utility companies (which Verizon can also be classified as) are boring. The mature and entrenched nature of the sector can mean some overlook the firms in the pursuit of high-growth names instead.
There’s also the case of the price-to-earnings ratio. At 10.41, it’s well below the 23.91 of the Dow Jones average. This is another sign it could be undervalued.
Looking forward, the multi-year-high in wireless subscriber growth shows momentum is strong and should continue. We’re now in a position where high capex spend and 5G enhancements are finishing, which means more scope this year for debt reduction. The boosted cash flow could also be used for more dividends, further boosting the yield and attraacting more income hunters.
Verizon is also pushing a strategy of bundling mobile and home internet. This should act to increase customer stickiness and reduce churn, a further help for the stock.
In terms of risks, Verizon’s balance sheet is heavily leveraged, with debt levels still elevated after years of network investment. If it doesn’t bring this down as cash flow improves this year, it’s not a great look for new investors.