Verizon Communications (VZ) is one of the two largest communications services providers in the country. The company has grown substantially due to the impressive performance of its wireless segment, Verizon Wireless. Verizon Wireless is probably the best wireless network in the country that offers a number of services. The stock has had an impressive start to the year and it has gained almost 11% since the start of the year.
However, future growth prospects of the company indicate that there is still upside potential available for Verizon. Furthermore, Verizon is one of the best income investments available in the market.
Future Growth Will Come From Wireless
Verizon Wireless is the jewel in the crown at the moment for the company, which generates substantial cash flows. At the moment, wireless services is the fastest growing segment in the market, and Verizon's position as the best wireless services provider gives it a unique advantage. Verizon's wireless services have the widest reach in the U.S. and the company covers more than 480 cities. At the moment, Verizon is the best 4G LTE services provider in the country, and it is expanding the reach of its wireless network. Recently, the company has expanded its 4G LTE network in Indiana, which takes its coverage to 273.5 million or 89% of the U.S. population.
Increased data usage over the next five years is extremely positive news for the company. Data usage is expected to grow by 10 folds over the next five years, which will result in increased demand for 4G LTE services. Smartphones, tablets and other mobile devices have played an important role in increasing demand for data services. Rise of smartphones and mobile devices have also given the companies an option to introduce new products and pricing strategies. Operators can now charge tiered pricing and multi-device pricing, which is resulting in better monetization.
Verizon Wireless is part owned by Vodafone (VOD), which holds 45% stake in the venture. Recently there have been a lot of rumors about the future of the venture. Analysts have put Vodafone's stake in Verizon Wireless between $106 billion and $137 billion. Some analysts want the company to buy Vodafone's stake through a leveraged buyout. If the company decides to buyout the venture; it will have to borrow heavily to conduct the transaction. However, if Verizon takes full control of the venture; it will result in a substantial increase in cash flows for the company in the short-term as well as long-term.
Telecom sector has some of the most attractive dividend yields. Verizon offers an attractive investment option to income investors. At the moment, the company pays an annual dividend of $2.06 per share, yielding 4.20%. The company has an impressive history of dividends and it has been increasing dividends regularly. Looking at the cash flows statement of the company, it is clear that the company is in an incredibly strong position. Verizon's payout ratio based on free cash flows has been low in the previous year. However, an increase in capital expenditures has resulted in decreased free cash flows.
In addition, an increase in dividend payments has also resulted in an increase in the payout ratio. During 2012, the company paid $13.55 billion in cash dividends, and for the same time period; Verizon generated $11.37 billion in free cash flows. As a result, payout ratio for the previous has gone above 100%. The company had to increase capital expenditures by almost $4 billion in order to increase the reach of its 4G LTE network. Verizon will have to make further capital expenditures in order to maintain its position as the leading 4G LTE services provider as the market is growing at an exceptional rate.
Verizon is a stable investment for investors who are looking to steady growth and attractive income. The company is expected to grow due to growth opportunities in the wireless segment over the next five years. Furthermore, dividend payments look secure due to an expected increase in cash flows from Verizon Wireless. Verizon's position as the leading 4G LTE services provider has set the company up for future growth. As a result, I believe there is substantial upside potential in this company.