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Last week, the portfolio gained $1,740 (+1.12%) and I completed the transition away from my beloved “growth” stocks when I sold Rocket Lab to buy……3M. Yup, you read that right.

Datadog and Snowflake are great companies, and I’m confident they will continue to do well. But I can’t justify their valuations in our current interest rate + economic environment.

Snowflake is currently trading at an enterprise value to sales multiple (EV/S) of 20 with 40% expected revenue growth over the next year. A good rule of thumb for SaaS/Cloud companies is to divide EV/S by fwd revenue growth. So 20/40 = 0.5. Datadog comes out to 0.55. SaaS/Cloud stocks historically have traded around 0.40 and in this environment, that’s the absolute high-end of where I’d want to own them.

That means Snowflake would need to drop 20% - 25% and Datadog would need to drop roughly 30% for me to get excited about owning them again.

Many out-of-favor “boring” stocks offer a much better risk/reward. So for now, I’m focused on investing in what I believe to be undervalued dividend-paying stocks that I believe will fare well (or even take market share) in a recessionary environment.

Verizon Position Size & Dividend Income

Verizon is a $13,000 position in the portfolio which provides $897 in annual income. Verizon’s dividend currently represents 5.6% of our total annual dividend income

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Verizon Thesis

1. Verizon’s network is a serious competitive advantage. According to a RootMetrics comparison, Verizon has the best 5G reliability of any carrier and performs best in major metropolitan U.S. markets.

2. Management expects capital spending to reduce significantly in 2023 as they finish incremental C-Band expansion spending which will be a tailwind for free cash flow. I think this could lead to meaningful share repurchases which could boost shareholder returns.

3. The stock is trading at a blended P/E of 7.5 which is well below its 20-year average P/E of 14.30 while paying a 6.8% dividend. Based on analysts’ reduced FY 2025 EPS estimates of $4.96 and P/E of 10.5 at the end of 2025, the investment would provide an annual return of 17%.

   

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Verizon Q4 2022 Highlights (Jan 2023)

My investment in Verizon is not on the basis of expecting crazy revenue growth. I believe they’ll be able to maintain low-single-digit revenue growth while they cut capital expenditures from $23B in 2022 to roughly $17B in 2024 which will give management plenty of free cash flow to maintain the dividend and potentially repurchase shares.

I encourage you to read through the snippet I shared from Verizon’s Q4 2022 earnings call below to understand management’s focus.

Hans Vestberg, CEO:

We measure our success in maximizing value across stakeholders by our ability to grow service revenue, EBITDA and cash flow. Taking these 3 metrics together is how we hold ourselves accountable. We are well positioned to improve our performance and accelerate growth on a go-forward basis with network quality as the foundation for our strategy and growth. We expect that wireless mobility and nationwide broadband will be the most significant contributors to Verizon's growth for the next several years. In 2022, we made important progress in each of these businesses. Our growth in these areas will be driven by extending our network advantage using our C-Band spectrum, which we expect will strengthen our network leadership in the coming years.

Our mobility and broadband plans are supported by our deep fiber position and ongoing fiber investments. Approximately 50% of our sites are now served by our own fiber, up from 45% last year. We believe we are the only provider serving that level of its wireless network with its own fiber. This supports superior quality of service and end-to-end owners' economics. That means better reliability and higher margins and look for us to continue to expand the percentage of sites on our own fiber. We also expanded our Fios footprint by over 550,000 locations in 2022, extending our Fios open for sales to more than 17 million locations. You can expect continued fiber expansion in the years ahead.

In summary, network quality is the foundation for our strategy and growth, and all of the moves we are making are focused on ensuring we continue our network leadership in the future.

You may recall that we embarked on a new cost-cutting initiative late last year. A component of this initiative is the formation of Verizon Global Services. This organization is accelerating efforts to drive cross-functional efficiencies, enabling us to reinvest savings in network superiority and customer growth while contributing to long-term profitability. Additional opportunity exists in sourcing, sales and marketing and corporate system, among others. The heavy lifting is now underway as we execute against our goal to deliver $2 billion to $3 billion of run rate savings by 2025. So our EBITDA strategy is clear: grow profitable volumes in both Consumer and Business based on our increasingly differentiated network and manage our expenses the way you would expect us to do.

By growing service revenue and EBITDA, we believe that we will be able to provide our shareholders with increasingly healthy free cash flow, which will support the strength of our balance sheet and fund our dividend growth. Our current streak of raising the dividend 16 years in a row is unmatched in the industry, and we intend to be able to continue that trend. Because our mobility and fixed wireless access products leverage the same infrastructure, they provide a capital-efficient path to future cash flow growth.

We believe that we will become increasingly efficient with our capital, using less capital to generate every dollar of revenue for years to come. That will enable us to produce expanding cash flow that we can both reinvest in our business and return to our shareholders.

And as you know, we're doing all of this as our capital spending budget is expected to decline from $23.1 billion in 2022 to under $19 billion at the midpoint of our guidance range this year, a reduction of nearly 20% year-over-year. In 2024, we expect our CapEx to be around $17 billion, which we expect to represent the lowest capital intensity in over a decade and among the lowest in the industry. We expect we will deliver a best-in-class network experience while reducing our 2022 CapEx levels by more than $5 billion over the next couple of years.

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