By Ahmed Ishtiaq
Verizon Communications (NYSE:VZ) is one of the biggest local phone companies, serving approximately 25% of the U.S. population. The company owns a network that reaches cities around the world. Verizon Wireless serves about 94 million retail customers across the United States. The company spun off its directories unit in 2006 and its local phone operations in Maine, Vermont, and New Hampshire in 2008. Additional lines were spun off to Frontier Communications (NASDAQ:FTR) in 2010. Verizon's wireline unit, with nearly 24 million landline accounts, provides local telephone, long-distance, Internet access, and digital TV services to residential and wholesale customers. In addition to those services, Verizon offers a wide range of telecom, managed network, and IT services to commercial and government clients in more than 150 countries.
Verizon is an attractive investment for income investors. Like many other companies in the telecom sector, the company offers an attractive dividend yield of 4.65%. At the moment, Verizon pays an annual dividend of $2.06 per share. Big companies like Verizon operating in the telecom industry tend to have attractive dividend yields, and it plays an important role in attracting investors. Moreover, the company has an impressive history of dividend increases. Strong cash flows and massive revenues make these giants an attractive investment for income investors. Dividend stability and attractive growth opportunities are the main factors that attract investors towards these behemoths.
Current and Future Products Driving Growth
Broadband and the internet have become an integral component for the telecom companies, and every company is trying to utilize it to the maximum. Verizon is not sitting back, and the company is trying to exploit another segment of the market. The company is planning to demonstrate Redbox Instant video-streaming services and internet-connected cars at the consumer electronics show. At the moment, Verizon's wireless segment covers about 470 cities with LTE service. The company is looking to consolidate its edge over its competitors AT&T (NYSE:T) and Sprint Nextel Corp (NYSE:S).
Verizon's LTE network has a solid reputation as an extensive network, and currently, the company is trying to exploit this reputation as much as possible. Furthermore, the company's Redbox venture with Coinstar Inc. (CSTR) has started offering video streaming and DVD rentals on a limited trial basis. Verizon plans to expand the service in the first quarter, with CES serving as its broader debut. Furthermore, Research In Motion (RIMM) will launch BlackBerry Z10 on 30th January. The new phone will be available through Verizon and AT&T. This launch will be massively important for Research In Motion as well as Verizon. If the phone delivers on its promise; Verizon can reap substantial benefits from the launch.
Threats and Opportunities in the Telecom Sector
Data services will play a vital role in the telecom sector over the next two years. At the moment, data usage is going up at astronomical rates. For any telecom company to prosper in the future; it will have to capture a substantial portion of this market. Verizon's extensive network has positioned the company nicely to exploit this growth opportunity. Furthermore, high speed will also enable additional growth in other markets, especially in banking, mobile payments, automotive telematics and healthcare. However, the biggest problem in the telecom sector is the massive amounts of capital expenditures.
In order to exploit these growth opportunities, the companies have to make huge capital expenditures. Growing a network demands substantial investment in infrastructure and new equipment. It is expected that the growth in data usage will outpace the growth in the technological advancement and network expansion. As a result, there could be a potential spectrum shortage. Over the past twelve months, the company has spent $18.6 billion in capital expenditures. However, heavy capital expenditures have enabled the company to have vast coverage and extensive network.
The biggest competitors for Verizon are AT&T and Sprint Nextel Corp. The table below lists some important metrics for comparison.
Debt to Equity
Price multiples are considerably high in the industry; however, Verizon trades at a discount compared to its peers. EPS growth is negative for both VZ and AT&T. Verizon demonstrated the best margins among these three companies.
Verizon has a massive network and among the best coverage in the industry. Despite premium pricing, the company is able to increase its market share. Especially, the wireless segment is growing at a rapid pace and it is making Verizon an industry leader. As I have mentioned above, there is a lot of room for the company to grow in the data services segment of the market. Verizon is taking steps to exploit this growth opportunity, which I believe will bring substantial revenues and cash flows for the company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ahmed Ishtiaq, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.