Verizon: A Great Buying Opportunity - Barron's

Trading for 12 times 2009 earnings of about $2.53, Verizon (VZ) offers an attractive refuge in a weak macroeconomic landscape, Barron's Sandra Ward says.

In times that are anything but normal, it pays to invest in a company that delivers reliable, business-as-usual results, keeps its focus on avenues of growth and holds the promise of market-beating returns.

Verizon's accomplishments during an economically dismal 2008 are impressive:

• invested $17B in capex
• launched a successful $28B bid for wireless provider Alltel
• increased dividend by 7%
• repurchased $1.4B in shares

And its aggressive pursuit of growth paid off: profits jumped 15% in Q4 as demand for its wireless services surged. Verizon also enlisted a record number of new customers for its FiOS fiberoptic TV/internet offering.

Verizon's Alltel acquisition puts Verizon Wireless (a JV with Vodafone (VOD)) in a unique position to benefit from what CEO Ivan Seidenberg sees as $100B in incremental revenue over the next 4-5 years from the sweet spot of wireless, wireless data, broadband and video. Indeed, data revenue soared 44% in 2008 to more than $10B/year. Verizon may some day buy out Vodafone (VOD). Wireless now counts for 55% of Verizon's revenue, and boasts a low churn rate, healthy margins, and a good reputation.

"You're able to buy good quality at a reasonable price," investment officer Cliff Hoover says. He praises Verizon's stable free-cash flow and 6% dividend yield, and says he sees shares ($30) being worth $41-42 over the next couple years. Money manager Richard Arvedlund also likes the yield, which at twice that of the long-term bond, and a cheaper tax rate of 15%, are compelling.

Comments

[Nick Waddell:]

I'm not sure about this one. Verizon has cash and short term investments of about 1.6 billion and long term debt of over 37 billion. They will have to make a lot of money for a lot of years to just get this to an acceptable level....

Feb 01 06:02 PM

[najdorf:]

Nick: Cash to debt ratio is not a valid metric, especially when you make no consideration of maturities. Cash flow to total debt or interest coverage are what matters, and Verizon is fine on these measures. They can borrow at 6% and their return on investment of those funds is a lot better than 6%. Why would a company with huge monthly cash inflows maintain a big cash balance sitting there earning 2% in a money market fund?

Note that this is not the same situation as a bank, which uses a lot of short-term funding and is dependent on credit quality of its debtors. VZ has lots of long-term debt and has had no problem issuing more lately. The economy would have to get much, much worse for people to start cancelling phone service to the extent necessary to make Verizon unable to service its debt.

Feb 01 06:37 PM

[tipalia:]

indeed cashflow is the name of the game for those companies. Good point raised by NICK , valid for a lot of companies not but not in this case, the more money they borrow the more money they generate . In fact they are more interested to borrow more rather than trying to eliminate their debt.

Feb 02 09:15 AM

[maz:]

najdorf is spot on - Verizon is somewhat like a utility with steady and predictable cash flows - it makes sense for them to borrow at 6% rather than issue much more costly & non-tax deductible equity - it lowers their WACC & creates value for shareholders. Bondholders are happy at 6% & little risk with treasuries around 3%

Feb 02 01:00 PM

[Asquared:]

I agree w/ najdorf. The only caveat, for what it's worth, is that holding a lot of debt in a deflationary enviornment is a bad thing. Using cash to pay interest as cash becomes more and more valuable is not shareholder friendly. We aren't in a deflationary enviornment....yet. And the fed is doing its best to avoid it. I'm just pointing out a potential risk to the story.

Feb 02 02:29 PM