The telecommunications industry is a haven for income investors. The underlying stocks are renowned for providing ample free cash flow and returning a large portion of their cash flow through to investors via hefty dividend yields.
You would think that telecom stocks would be ideal for more risk-averse investors who value stability and income from their stock investments. However, telecom stocks have been volatile in recent weeks. In light of this, should investors dial up Verizon Communications Inc. (NYSE:VZ) for addition to their portfolios? Or are you better off avoiding the stock altogether?
A dark time for dividend stocks
On June 19 and 20, the Dow Jones Industrial Average dropped more than 500 points over the two-day period. Both Verizon and close rival AT&T Inc. (NYSE:T) are Dow components, and each stock got crushed during the market rout.
Because of rampant market pessimism directly related to the Federal Reserve tapering off its monthly bond purchases and fear of rising interest rates, the twin telecom stocks suffered mightily. As the theory goes, dividend stocks are less valuable in a rising interest rate environment. Since prices and yields move in opposite directions, stock prices would need to decline in order for yields to rise in conjunction with interest rates.
To emphasize, consider that since hitting their recent highs, Verizon Communications Inc. (NYSE:VZ) and AT&T have dropped 9% and 12%, respectively, in just a few weeks.
Steady underlying financial results
Excluding recent events, both industry titans display the solid fundamentals that make owning their stocks so valuable for investors who shun volatility.
Verizon has outperformed its major rival in recent months. The company’s first-quarter consolidated earnings per share rose 15% year over year. In particular, the success of Verizon’s Wireless segment continues to impress: Verizon Wireless realized 8% year-over-year increases in both service revenues and retail service revenues, and achieved record operating and earnings before interest, taxes, depreciation, and amortization (EBITDA) margins.
2012 served to be a prosperous year for the company and its shareholders. Last year, Verizon Communications Inc. (NYSE:VZ)booked more than $115 billion in total revenues. The company generated $31.5 billion in operating cash flow, representing 5.7% growth versus the prior year.
Verizon Communications Inc. (NYSE:VZ) used much of this cash flow to invest in its business and provide shareholders with meaningful returns. The company invested $16.2 billion in its networks last year and paid more than $5 billion in dividends.