Verizon Communications shares should rise this year as a healthy dividend yield lures investors ahead of clarity on its path for 5G wireless, according to J.P. Morgan.
The firm raised its rating on the company’s shares to overweight from neutral, foreseeing a better competitive climate over the next 12 months.
“Verizon seems to be the one carrier that is heads down, executing on the business, and could see its share improve commensurately,” analyst Philip Cusick wrote Friday. “We have an increased level of confidence that revenue can stabilize and potentially start to grow. Given the potential issues and distractions of its wireless competitors, we are less negative on the overall wireless industry.”
The J.P. Morgan team – which recently held a meeting with Verizon chief executive Lowell McAdam – said the company could introduce a number of mobile 5G handsets in 2019. The long-term goal focuses on developing industrial applications, such as smart cities, connected cars and Internet of Things.
The 5 percent dividend yield on Verizon shares should also attract investors, the analyst said, despite the 10-year Treasury note yield’s recent move toward 3 percent.
“If rates continue higher, Verizon with a 5 percent yield could struggle. We would balance this though with the defensive nature of the business, its 66 percent payout ratio and high dividend yield, and declining leverage,” Cusick wrote. “We believe that from this price, when including the dividend, Verizon shares should outperform in a flat to falling market.”
The analyst held his 12-month price target steady at $58, implying 22 percent upside over the next year. Verizon’s stock is down 10 percent since January, though shares were up nearly 1.5 percent in premarket trading Friday.
He also noted CEO McAdam’s lukewarm attitude toward buying or merging with media companies, saying that Verizon has no plan to establish its own video streaming platform but that it plans to announce a partnership with an existing provider later this month.
“The company also downplayed interest in buying cable or large spectrum assets, though commenting that each could make sense at the right price,” Cusick added. “Management is comfortable with the company’s asset portfolio, making us less worried about the potential distraction of a big media, cable, or spectrum deal.”
Wall Street has long speculated on a Verizon deal, theorizing that a tie-up with a large media conglomerate like Comcast could be financially sound given rampant consolidation in the media and telecommunications industries.
Other analysts, like Citigroup’s Jason Bazinet, have encouraged such a merger, arguing that the tip-up could boost revenue at the combined company.
Telecom giant AT&T and media giant Time Warner are waiting on regulatory approval for their $85 billion combination, which would marry video content with delivery on mobile devices.
Disclosure: Comcast is the owner of NBCUniversal, the parent company of CNBC and CNBC.com.
—CNBC’s Michael Bloom contributed to this report.
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