Key Points
Mobile operator Verizon (NYSE: VZ) has seen its shares sell off in the wake of the SpaceX (NASDAQ: SPCX) IPO, lifting Verizon’s dividend yield to 6.7%. The sell-off looks overdone in my view, making the stock an attractive buy at current levels.
Investors worry that SpaceX will use its leadership in satellite internet to challenge traditional mobile carriers like Verizon. However, there are multiple hurdles to this happening. Two of the biggest are technology constraints and regulatory issues.
A look at the potential threat
Cellular networks, like Verizon’s, use dense, localized cell towers and small cell antennas that reuse spectrum thousands of times within a single city. Low-earth-orbit (LEO) satellites like those SpaceX deploys, on the other hand, project massive beams over large areas. If millions of people in a dense city or suburb tried to stream video via direct-to-cell satellite at the same time, capacity would collapse. Meanwhile, modern green building initiatives, such as reinforced concrete, steel, and low-e glass used in office buildings, block satellite signals.
Even SpaceX’s VP for satellite engineering, Michael Nicolls, stated this at the company’s Mobile World Conference: “Satellite is complementary to terrestrial networks; it cannot provide the data density that terrestrial networks have. But it can augment terrestrial networks in areas where they cannot reach. Or when terrestrial networks need additional capacity.”
Meanwhile, after discussing the potential for SpaceX to offer a mobile network with a former FCC attorney, BNP Paribas analyst Sam McHugh concluded there were few ways for SpaceX to enter the mobile space unless those companies struck a deal with SpaceX. He noted that current FCC rules prevent Elon Musk’s company from requiring carriers to enter wholesale network agreements or to provide roaming access.
While there is a risk SpaceX gets into space by acquiring a carrier like T-Mobile, the three big carriers did form a joint venture to help address coverage gaps in the U.S. by pooling spectrum, looking to fend off any risk from satellite companies.
Bundling opportunity ahead
Putting aside SpaceX’s concerns, Verizon has a big opportunity ahead as it starts to cross-sell and bundle wireless and broadband services to the customers it gained when it acquired Frontier Communications earlier this year. This should be a nice subscriber and revenue growth driver, as only about 20% of its customers have both wireless and broadband subscriptions.
Meanwhile, Verizon’s dividend is safe and well covered, with the company having low leverage and a dividend (around $12 billion projected this year) that is easily covered by its free cash flow ($21.5 billion forecast).
With a nearly 7% yield and a forward price-to-earnings (P/E) ratio of 8.6 based on 2026 earnings estimates, I think this dividend stock looks like a buy on its recent price dip.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.
