Verizon (VZ) Earnings Analysis | Full-Year Guidance Raised with 6.6% Adjusted EPS Growth, 6.05% Dividend Yield [FY2026 Q2 Japanese Commentary]

The first thing investors in high-dividend stocks should check is not EPS, but cash flow. For Verizon's April-June 2026 quarter, GAAP diluted EPS fell 22.0% year-over-year. On the other hand, the adjusted EPS disclosed by the company was $1.30, up 6.6%. The six-month cumulative free cash flow was $10.21 billion, up 16.0% year-over-year, covering dividend payments of $5.86 billion by 1.74 times. On the same day, the company raised its full-year adjusted EPS guidance to $4.99–$5.04. We will verify the backing for the 6.05% dividend yield using the 10-Q and the earnings announcement.

Summary of this quarter's earnings (3 lines)

・GAAP EPS is -22.0%, but company-disclosed adjusted EPS is +6.6%, and two-segment operating income is +7.8% (Adjusted EPS $1.30 / Consumer $8.03 billion) — A quarter where accounting profit decline and business reality moved in opposite directions

・The reason selling, general, and administrative expenses increased by 15% is one-time expenses of $1.343 billion ($746 million loss on sale of international line business / $397 million in severance pay for layoffs) — The true nature of the profit decline is asset disposal and structural reform, not the core business

・Free cash flow is +16.0% over 6 months, covering dividends 1.74 times (FCF $10.21 billion / Dividends $5.86 billion) — The cash supporting the yield of over 6% is increasing

Company Overview

In short, it is a telecommunications company with one of the largest mobile phone and fiber-optic networks in the United States. The reporting segments are Consumer and Business, and the sales composition for this quarter was 79% Consumer and 21% Business.

On January 20, 2026, the acquisition of Frontier Communications was completed, expanding the fiber-optic broadband service area. The acquisition of Starry Group Holdings was also completed on January 30. Meanwhile, the international line connectivity and managed network services business has been classified as held for sale, as the company simultaneously proceeds with organizing its business portfolio.

Three points for this term

Point 1: The true nature of the revenue decline is device sales

Operating revenue was $34.25 billion, a year-over-year decline of 0.7%. However, the evaluation changes when broken down.

Service revenue and others increased by 3.5% from $28.25 billion to $29.23 billion. What decreased was wireless equipment revenue, which fell 19.7% from $6.26 billion to $5.02 billion. Equipment revenue decreases as the device replacement cycle lengthens, but since this revenue also incurs almost the same amount in cost, the impact on profit is limited. In fact, wireless equipment costs also decreased from $7.01 billion to $5.86 billion.

In other words, the main cause of the revenue decline is the contraction of the sales portion, which has almost no profit margin. To measure the true strength of a telecommunications company, it is more appropriate to look at the +3.5% in service revenue.

Point 2: The contents of the $1.343 billion one-time expense

GAAP operating income fell 12.2% from $8.17 billion to $7.18 billion, and diluted EPS fell 22.0% from $1.18 to $0.92. The cause is selling, general, and administrative expenses. They increased by $1.17 billion from $7.81 billion to $8.98 billion.

The 10-Q lists three factors for this increase. First, a net loss of $746 million associated with classifying the international line connectivity and managed network services business as held for sale. Second, an increase of $397 million in severance expenses related to layoff measures. Third, $200 million in asset rationalization expenses recorded in 2026. The total is $1.343 billion, which exceeds the increase in selling, general, and administrative expenses.

The main indicator to use here is the adjusted EPS disclosed by the company. Verizon announced an adjusted EPS of $1.30 for this quarter, which is +6.6% compared to $1.22 in the same period last year. The company reflects the tax effects of each adjustment item, including the amortization of acquired intangible assets, individually.

For reference, a simple calculation adjusting only the three items above at a flat tax rate of 25.1% results in $1.16 per share, but this is an estimate by the author and does not align with the company's adjustment scope. The following investment judgment uses the adjusted EPS disclosed by the company.

Note that retirement benefits are expenses that involve cash outflows. They cannot be treated in the same way as items like losses on sales, which are merely accounting write-downs, as 'not involving cash outflows'.

The figures on the business side are also favorable. The combined operating income of the two segments increased by +7.8%, from $8.37 billion to $9.02 billion. Consumer was +5.1% and Business was +36.9%. One-time expenses are recorded in 'Corporate and other,' so they do not affect segment profit.

Point 3: Cash supporting the dividend

This is the most important metric for a high-dividend stock. Six-month operating cash flow was $18.42 billion, up +9.9% year-on-year, and free cash flow, after subtracting $8.21 billion in capital expenditures, was $10.21 billion, up +16.0%.

Dividend payments for the same six-month period were $5.86 billion. The coverage ratio by free cash flow is 1.74x, an improvement from 1.54x in the same period last year. The company expects full-year 2026 capital expenditures to be between $16.0 billion and $16.5 billion, and the first-half result of $8.21 billion is in line with this pace.

On the other hand, the financial burden has increased. Interest expense rose +21.1% from $1.64 billion to $1.99 billion. In conjunction with the Frontier acquisition, the company assumed approximately $12.9 billion in debt, and funding through long-term borrowings reached $9.94 billion over the six months.

Biggest risk: Will the acquired fiber-optic business exceed the increase in interest payments?

The structure of this risk is clear. Verizon acquired Frontier to expand its fiber-optic network, and as a result, interest payments have increased. The question is whether the profits generated by the acquired business will exceed the increased interest payments.

The expense side is already fixed. Interest expense has increased by $346 million per quarter. This is an additional burden of approximately $1.4 billion annually. In addition, cash expenditures related to acquisitions over the six months were $9.48 billion, and $1.16 billion was spent on acquiring wireless licenses, causing cash outflows from investing activities to expand to $18.50 billion (compared to $7.19 billion in the same period last year).

The revenue side is still under verification. According to the 10-Q, operating revenue from the Frontier and Starry acquisitions is less than 5% of the consolidated total. Only six months have passed since the acquisition, and there is not enough data to judge the revenue contribution of the fiber-optic business.

The chain reaction proceeds as follows: If service revenue continues to grow, the increase in interest payments can be absorbed. However, service revenue growth was only +3.5%, which was not enough to offset the -19.7% decline in equipment revenue, leading to an overall decline in revenue. If this state continues, the increased interest payments will squeeze net income and eventually affect the capacity for dividends.

The monitoring indicator is the free cash flow dividend coverage ratio. The current value is 1.74x (six months), and the threshold is set at 1.3x. There is a margin of 0.44x, so there is sufficient leeway for the time being. However, if capital expenditures reach the upper end of the full-year forecast of $16.5 billion and operating cash flow remains flat, the coverage ratio is calculated to drop to around 1.5x. If the situation falls below 1.3x, it will be necessary to factor in the possibility of a dividend freeze or cut.

Another point to note is the basis for the $746 million loss on sale. The 10-Q states that the fair value of the international line business falls under Level 3 fair value measurement, using significant judgments and unobservable inputs such as the amount and timing of future cash flows and discount rates reflecting risk. If the premises change as the sale process progresses, additional write-downs may occur.

Author's View

The judgment is Hold. While the backing for the dividend has been confirmed, operating revenue is declining, and the stock price is within the range of the base scenario, so I have judged that this is not a level to buy anew.

I will list three reasons in order of high certainty.

First, dividend safety can be rated as high. Six-month free cash flow was $10.21 billion, up +16.0%, and the coverage ratio against $5.86 billion in dividend payments is 1.74x. The dividend payout ratio, calculated by dividing the annual dividend of $2.83 by the company's full-year adjusted EPS guidance midpoint of $5.015, is approximately 56% (author's calculation), which provides a buffer. The fact that the actual payout ratio of 73.73% looks high is because GAAP earnings are being pushed down by one-time expenses.

Second, growth remains a challenge. Operating revenue is down -0.7%, and the +3.5% growth in service revenue has not been enough to offset the -19.7% decline in equipment revenue. Under the quantitative criteria for high-dividend, value companies, it meets all four conditions: dividend yield of 3% or more (6.05%), payout ratio of 70% or less (approx. 56% based on company guidance), free cash flow growth (+16.0%), and P/E ratio of 20x or less (actual 12.01x). However, the same criteria clearly classify cases where 'dividends are attractive but growth is lacking (sales growth less than +5%)' as 'Hold,' and the -0.7% operating revenue falls into this category.

Third, valuation. As of the July 31 closing price of $46.81, the market capitalization is approximately $194.5 billion. The EV is $380.58 billion, which is about 2.0 times the market capitalization. The difference of $186.1 billion is an adjustment in the EV calculation; since external data definitions may include leases and non-controlling interests, it is not necessarily the net interest-bearing debt itself. The trailing P/E ratio is 12.01x, and the stock price to the midpoint of the company's full-year adjusted EPS guidance is 9.3x (author's calculation). The price-to-sales ratio (PSR) is 1.40x. Peer AT&T is also at a high-dividend, low-P/E level, indicating that the entire telecommunications sector is receiving a low valuation.

I have set three scenarios by multiplying the FY2027 adjusted EPS by a P/E range. The starting point is the midpoint of $5.015 from the FY2026 adjusted EPS guidance of $4.99–$5.04 (up 6.0–7.0% year-over-year), which the company raised on the same day.

Bearish Scenario ── Equipment revenue continues to decline, making the decline in operating revenue permanent; FY2027 adjusted EPS at -2% of $4.91 × P/E 7.5–8.5x = $37–$42

Base Scenario ── Service revenue maintains +3% growth and the Frontier integration progresses; FY2027 adjusted EPS at +4% of $5.22 × P/E 8.5–10.5x = $44–$55

Bullish Scenario ── Fiber optic business contributes to earnings and operating revenue turns to growth; FY2027 adjusted EPS at +8% of $5.42 × P/E 10.5–12.5x = $57–$68

In the bullish scenario, I have raised the P/E ratio. The premise is that if operating revenue turns to growth, the market will re-evaluate the company not as a "high-dividend stock in a shrinking equilibrium" but as a "dividend stock with growth." A 1–2 point increase in the P/E ratio of a telecom stock alone moves the share price by more than 10%. Conversely, if the revenue decline continues, this 10.5–12.5x range will not hold.

The current share price of $46.81 is within the base scenario range of $44–$55, positioned slightly less than 30% from the bottom. The upside potential to the top of the base scenario is about 17%, and the downside to the bottom of the bearish scenario is about 21%. If you factor in the 6.05% dividend yield, the expected return for a one-year holding period enters positive territory, but the upside potential for the stock price itself is limited. The conditions to switch to a buy are when it is confirmed that operating revenue has turned positive year-over-year, or when the stock price falls below $44 and the dividend yield exceeds 6.4%.

Future Business Outlook

Confidence: High ── Dividend Maintenance

Six-month free cash flow covers the dividend 1.74 times, an improvement from 1.54 times in the same period last year. Capital expenditures are also tracking within the full-year forecast range. The risk of a dividend cut appears low for the time being.

Confidence: Medium ── Continued Growth in Service Revenue

Service revenue is solid at +3.5%, but mobility and broadband service revenue in the business segment was $3.721 billion, a slight decrease from $3.726 billion in the same period last year. Growth is dependent on the consumer segment, and the competitive environment in the business market is tough.

Confidence: Low ── Turnaround to Operating Revenue Growth

For operating revenue to turn to growth, the decline in equipment revenue must stop, or Frontier's fiber optic business must contribute in earnest. According to the 10-Q, operating revenue from the acquisitions of Frontier and Starry remains less than 5% of the consolidated total, making it difficult for this scale to boost the overall figure for the time being.

Summary

Although I did not touch upon it in the main text, these earnings results demonstrate how to read high-dividend stocks. If you only look at the news that GAAP EPS fell by 22%, it would not be strange for investors to worry about a dividend cut. However, if you open the 10-Q, you can see that the cause of the profit decline is expenses associated with asset disposals and structural reforms, and that free cash flow, the source of the dividend, has actually increased by 16%. Note that even among one-time expenses, while a loss on sale is merely an accounting write-down, severance pay involves cash outflows. You must read them by distinguishing their nature. For high-dividend stocks, the cash flow statement comes before the income statement. Conversely, a company where EPS is strong but free cash flow is below the dividend is far more dangerous.

The overall judgment is Hold. I was able to confirm the safety of the dividend, but operating revenue is declining and the stock price is within the base scenario. I will switch to a buy if operating revenue turns to growth or if the price falls below $44 and the yield exceeds 6.4%.

Related Article Links

・Verizon (VZ) Previous Individual Analysis Article：

・Verizon (VZ) previous individual analysis article：

・Latest quarter for peer AT&T(including VZ)：

・Comparison of the US Telecom Big 3(including VZ)：

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