Verizon's Turnaround Accelerates: Is the 6.5% Yield a Buy?

Verizon reported third-quarter earnings that beat expectations, with adjusted earnings per share of $1.31, up 8.3% year over year. The company added 406,000 postpaid phone customers, an 820% increase from the prior year, marking its strongest third-quarter postpaid phone net additions in five years. Churn also improved, showing better customer retention.

The strong customer growth drove free cash flow of $7.8 billion, up 12.1% year over year. Through the first nine months, Verizon generated $18 billion in free cash flow, a 14.3% increase, which comfortably covers its dividend payments of $8.8 billion. The company also repurchased $4 billion in stock year-to-date.

Management raised full-year guidance for the third consecutive quarter, now expecting adjusted EPS growth of 7%-7.5% (up from 6%-7%) and free cash flow growth approaching 12% (up from 9%-10%). CEO Dan Schulman highlighted the company's fiber network as key to powering AI infrastructure, citing partnerships with Amazon Web Services (over $2 billion) and Google (over $1 billion).

Despite the positive results, Verizon shares have fallen nearly 8% over the past month due to a post-earnings slump and concerns about potential competition from SpaceX. The stock now trades at about 8.5 times forward earnings, a steep discount to the S&P 500's 19 times, and offers a 6.5% dividend yield.

Verizon's accelerating customer growth and margin expansion indicate that its turnaround strategy is working. The company is winning high-value customers while retaining existing ones, which is driving stronger cash flow and allowing it to raise guidance. This is crucial because Verizon has been viewed as a slow-growth telecom, and any sign of sustainable growth can lead to multiple expansion.

The AI infrastructure deals with Amazon and Google are a new growth avenue. These partnerships not only provide additional revenue but also position Verizon as a key player in the AI ecosystem, potentially attracting more tech giants. If Verizon can continue to sign such deals, it could diversify its revenue stream and reduce reliance on traditional wireless services.

However, the threat of SpaceX entering the U.S. mobile sector looms large. If SpaceX disrupts the market with competitive pricing, Verizon's growth could stall. The market is clearly pricing in this risk, as evidenced by the stock's recent decline. But the company's strong fundamentals and cheap valuation provide a margin of safety.

At 8.5 times earnings, Verizon is cheap compared to the broader market. The dividend yield of 6.5% is well covered by free cash flow, and the company has excess cash for buybacks and debt reduction. Even without significant earnings growth, the stock could deliver around 10% annualized returns, making it attractive for income-focused investors.