The S&P 500 Index has recovered all of its losses from the stock market crash in March. But the U.S. economy is by no means in the clear. A recent resurgence of the coronavirus marked by soaring cases and rising hospitalizations has resulted in renewed fears of another downturn. The Dow Jones Industrial Average and the S&P 500 have sold off in the past few days, which could prompt risk-averse investors to head for safety.
For investors fearing a market downturn, buying high-quality dividend stocks is a way to reduce portfolio volatility. One way to measure volatility is with beta, a common financial metric that shows a stock’s correlation (or non-correlation) with the broader market index.
Verizon Communications (NYSE:VZ) could help investors lower their portfolio volatility. The stock has a high dividend yield of 4.4%, which will help offset a market crash. It is also a low-beta stock with a beta value below 0.60. These qualities make Verizon an appealing holding for risk-averse income investors looking to reduce volatility.
Business Overview And Recent Events
Verizon is the largest telecom in the United States by market cap. Verizon is a mega-cap stock with a market cap above $250 billion. The core of Verizon’s business is Verizon Wireless, which contributes roughly 75% of all revenues. Verizon also provides a full range of telecom services, including broadband and cable, which account for the remaining ~25% of revenue. But Verizon Wireless is the company’s crown jewel, as its network covers about 300 million people and 98% of the U.S.
Verizon has a recession-resistant business. While it has not been completely spared from the coronavirus pandemic and ensuing economic recession, it has continued to generate strong earnings and cash flow. Verizon released earnings results for the third quarter on Oct. 21. Revenue fell 4.1% to $31.5 billion. Adjusted earnings-per-share of $1.25 matched last year’s result, but was $0.03 higher than expected.
Despite the modest drop in quarterly revenue, Verizon’s earnings have stayed afloat, thanks largely to its customer additions. Verizon had a total of 553,000 retail postpaid net additions for the third quarter, including 428,000 postpaid smartphone net additions, far higher than estimates of 311,000 postpaid net additions. In addition, churn remained very low. Wireless retail postpaid churn was 0.89%, while retail postpaid phone churn was 0.69%.
Verizon’s steady results are due to its network, which is widely regarded as the strongest in the nation. As consumers are extremely unwilling to cancel their wireless, cable or broadband service, even during a recession, Verizon’s financial results have held up quite well over the course of 2020. Last quarter, Verizon’s wireless service revenue increased 0.7% to $13.4 billion. This segment benefited from a low churn rate as well as 139,000 Fios Internet net additions, the company’s best total there since the fourth quarter of 2014.
Cash flow from operations through the end of the third quarter was $32.5 billion, an improvement of $5.7 billion compared with the previous year. Verizon now expects adjusted EPS growth of 0 to 2% for the full year. As a result, Verizon is likely to hold up much better than many other companies this year.
Verizon: High Dividend Yield And Low Volatility
Investors considering volatility in their investment decisions should consider a stock’s beta value. Beta is measured by a formula that calculates the price risk of a security or portfolio against a benchmark, typically the S&P 500. A beta value less than 1.0 means that a stock is correlated with the S&P 500, but is expected to move less than the broader index. For example, Verizon has a 5-year beta value of 0.54. This means that for every 1% move up or down in the S&P 500 Index, Verizon stock will move 0.54% in the same direction.
Therefore, if the S&P 500 were to decline 10%, Verizon stock would be expected to decline only 5.4%. This also means Verizon would underperform in a bull market, but investors anticipating a market crash would see a milder decline.
Beta can be a valuable tool for investors, as low beta stocks have historically outperformed the market. Even better, high-quality dividend stocks have also proven to outperform over long periods. Investors that buy blue-chip dividend stocks with low volatility (such as Verizon) have a good chance to generate superior long-term returns.
Verizon has a current dividend yield of 4.5%, which is more than double the average yield of the S&P 500 Index. And, Verizon has increased its dividend for 14 consecutive years, including a recent 2% dividend raise. We believe Verizon will continue to increase its dividend each year, thanks in large part to the company’s stable revenue and earnings. With an expected dividend payout ratio just above 50% for 2020, Verizon’s dividend is highly safe, with room for annual dividend increases moving forward.
One of Verizon’s key competitive advantages is that is often considered the best wireless carrier in the U.S. This is evident from the company’s wireless net additions and very low churn rate. This reliable service allows Verizon to maintain its customer base as well as give the company an opportunity to move customers to higher-priced plans. Verizon is also in the early stages of rolling out 5G service, which will give it an advantage over other carriers.
Final Thoughts
Stocks with low beta values are less correlated to the swings of the broader market index. Therefore, if investors expect the S&P 500 Index to decline in the coming weeks or months, it makes sense to buy stocks with low beta values. Verizon has a low beta value below 1.0, meaning it is not expected to rise or decline as much as the broader index.
Verizon also has a high dividend yield of 4.5%, and the company increases its dividend each year. With a high dividend yield, a recession-resistant business model, and a low beta value, Verizon is an attractive holding for risk-averse income investors.