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Citi upgrades Verizon and AT&T, says companies can support their nearly 8% dividend yields

Our focus at Income Builder is on real income-producing asset classes that offer the opportunity for reliable income, diversification, and inflation hedging.Led by a team of CFA Charterholders at Hoya Capital, we've assembled the top analysts and contributors from across Seeking Alpha and beyond. Members receive complete access to Hoya Capital's investment research and commentary and from our team of contributors including Gen Alpha, ETF Monkey, Retired Investor, Sunday Investor, Philip Eric Jones, and Alex Mansour.SummaryVerizon's share price weakness belies its fundamentals, with negative market sentiment pushing the yield near an all-time high.The company's second-quarter results show positive signs, including growth in wireless revenue and net additions in the business segment.Verizon is well-positioned for future growth in broadband, could benefit from price increases, and is reducing debt and operating costs.Looking for a portfolio of ideas like this one? Members of Hoya Capital Income Builder get exclusive access to our subscriber-only portfolios. Learn More »Adene Sanchez/E+ via Getty ImagesMost investors will try to avoid catching a falling knife, and Verizon (NYSE:VZ) may fit that mold, with its price having materially fallen over the past 18 months. For many investors who started buying VZ on the dip last year, cheap has only gotten cheaper, as VZ now yields a whopping 8%, a level previously thought impossible by most investors.While it's easy to dislike a stock that's fallen by so much, value and income investors know that the best time to accumulate an income stock is when market sentiment is working against it. That's why instead of being overly-rotated on share price action, I focus more on growing my cash flows with stocks like Verizon, all while reducing my cost basis on the way down. Having a diversified basket of quality income payers like VZ is key to my sleeping well at night, no matter what macroeconomic uncertainties may lie ahead.I last covered VZ here in July, noting that concerns around lead sheathed cables appear to be overblown. It appears that the market has backed off initial concerns as well, as the stock price has lifted by 2.5%, performing better than the 2% decline in the S&P 500 (SPY) over the same time. In this article, I highlight recent Q2 results and discuss why VZ may be a terrific income play at present, so let's get started!Why VZ?Verizon has been no stranger to market headwinds over the past year, and judging by the share price action alone, it would seem as if the wheels were falling off. That doesn't appear to be the case, however, considering the positives in its second-quarter results.This includes retail postpaid net additions of 612,000 and a retail postpaid churn rate of 0.83%, which is within historical norms. While total revenue did decline by 3.5% YoY to $32.6 billion, that was due to lower wireless equipment revenue and lower postpaid phone upgrade activity. In the meantime, wireless revenue grew by 3.8% YoY to $19.1 billion, driven by price increases. This helped VZ to achieve 0.8% YoY growth in EBITDA to $12.0 billion, which is net of a one-time $237 million pre-tax severance charge.With just 3 major wireless players remaining after T-Mobile's (TMUS) acquisition of Sprint, it only makes sense that Verizon and its peers are going to price rationally going forward. For example, T-Mobile's commitment to not raise prices for 3 years after acquiring Sprint in 2020 ended this year, and its CEO Mike Sievert recently stated that the carrier does not intend to maintain static prices and would respond to things like inflation.While competitors T-Mobile and AT&T (T) have made gains in network quality over the years, Verizon remains in the leadership spot, being the most awarded brand for wireless network quality this year in J.D. Power's US Wireless Network Quality Study for the 31st time.At the same time, VZ continues to gain traction in the business segment, with 125,000 postpaid phone net adds during Q2, representing its eighth consecutive quarter of growth. This includes winning a mandate from the US Department of Veterans Affairs, and the recent completion of work to launch a next-generation private networking solution at the Cleveland Clinic, which is expected to support their healthcare mission for years to come. Management noted that the total addressable market for private wireless market is expected to grow significantly, and that VZ is expected to capture a meaningful share.VZ is also well-positioned to grow its broadband business through Fios and fixed wireless, with its third consecutive quarter of over 400,000 net broadband adds, putting it on track to meet its target of 4 to 5 million fixed wireless access subscribers by the end of 2025, from a current base of nearly 2.3 million subscribers.Looking ahead, VZ has the potential to be a more profitable enterprise, as management seeks to reduce annual operating expenses by $2-3 billion by 2025 through a combination of supply chain efficiencies, IT transformation, leveraging AI, and rationalizing its real-estate footprint. As shown below, VZ scores an A+ grade for profitability, with sector-beating margins and return on equity.

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