Shares of telecommunications companies like Verizon have been under pressure this year following record spending in the C-Band spectrum auction.
With fierce competition to be a leader in 5G capabilities, telecom companies proved willing to go deeper into debt to ensure they were not left behind with inferior networks.
Earlier this year, we wrote a note on Verizon that covered the importance of 5G and the potential impact of the record spend on additional spectrum licenses.
As we expected, following Verizon's record $45 billion purchase of C-Band spectrum licenses, the company's debt ratio spiked to 2.9x, well beyond the firm's targeted 1.75 to 2.0x range.
Since then, Verizon has been able to pay down and restructure some debts while growing earnings, resulting in the debt ratio pulling back to 2.7x.
The noted earnings growth has come, in part, from Verizon growing its post-paid subscriber base by nearly 700,000 last quarter alone. Furthermore, around two-thirds of those new subscribers signed up for higher-priced premium plans.
In fact, Verizon has also successfully transitioned existing customers into higher-priced plans while experiencing historically low churn rates. About 30% of customers are now on premium plans.
As Verizon's 5G capabilities expand, management expects more customers to sign up for premium plans to take advantage of 5G offerings.
Given that the BBB+ rated Verizon has already shown progress in deleveraging from record levels and recently increased its dividend by 2%, all while maintaining a healthy payout ratio, we are reaffirming the firm's Very Safe Dividend Safety Score. As Verizon continues to roll out 5G, we expect the telecom giant to continue offering best-in-class networks that should continue to support strong demand for its services.
Verizon believes the recent positive momentum in customers shifting to premium plans will continue, so much so that they raised guidance for next quarter's earnings while also increasing the dividend for the 15th consecutive year.
We'll continue to monitor Verizon and provide an update if we feel something materially changes that could prove a threat to the firm's dividend policy.