Don't Be Misled By Recent Diluted EPS, Verizon Still A 'Buy'

| About: Verizon Communications (VZ)

Verizon (NYSE:VZ) is an industry leader in communication, Internet and related wireless technology. It has a variety of services and products, most notable the new 4G LTE router. It is anticipated that these products will help the company to succeed in the near future and for the long term. Earnings data and some negative press concerning its VoiceLink service admittedly cast a cloud of skepticism over the company. Nevertheless, such news must be kept in perspective: All prominent companies have critics and all make mistakes. Taking that into account, Verizon has done rather well and seems poised to continue delivering superior returns to its equity investors.

Innovation Award
Recently, Verizon was named an InformationWeek 500 innovator for the 17th year. Select companies receive this recognition for their leadership in wireless communication and related technology. Verizon has managed to transform its research prowess into a substantial share of the mobile device market. For example, Verizon developed a new wireless 4G LTE router that will likely boost revenues and circumvent legal regulations about net neutrality. The company offers several monthly payment options that allow subscribers to download up to 10GB/month via high-speed wireless internet.

Reputation Pitfall
Verizon intended to replace communication lines damaged by Hurricane Sandy with its much-criticized VoiceLink service. VoiceLink has been criticized for being incapable of handling typical emergency communications and connectivity requirements. VoiceLink also has a history of malfunctioning. Some worry that allowing Verizon such near-monopoly over an important communication channel is not in the public interest.

Net Neutrality and Verizon
Here it is relevant to mention net neutrality and how it applies to Verizon operations. Wired network providers such as Verizon have to abide by neutrality and impartial pricing and service performance standards collectively known as net neutrality. The technicality Verizon is arguing and trying to exploit has to do with 4G LTE service being a wireless instead of wired service. Traditionally, net neutrality applied to wired services, with wireless data transfer giving businesses greater freedom in pricing structure, performance and availability.

Verizon Financial Data
Diluted EPS took a big hit in FY 2012 compared to previous years. Diluted EPS decreased 5.56 percent from FY 2010 to 2011, ending at $0.85/share. In FY 2012 EPS sank to $0.31/share, a huge 63.5 percent drop from 2011 levels and 65.5 percent from diluted EPS in FY 2010. Note that basic EPS remains roughly the same, with no distinctive drop in FY 2012. At the same time, consolidated revenues increased 8.63 percent between FY 2010 and FY 2012. Dividends per share also gave positive results, with $2.03/share, corresponding to a 5.45 percent boost from FY 2010 levels. The company's Verizon Wireless division contributed 65.5 of all consolidated revenue in FY 2012, up from 59.5 percent in FY 2010. Verizon's future seems to be with its Wireless division, which, according to its most recent annual report, Verizon seems to be developing into a stronger and more prominent business unit. Gross and net profit margins show an encouraging trend as well. This and other financial data indicate that, despite the most recent year's diluted EPS drop, Verizon is likely to do well in the future.

Weaknesses and Threats
Verizon has to manage or absorb some shortcomings. Perhaps most prominently, the company charges more for certain plans than many competitors, such as Sprint (NYSE:S). Though Verizon has international presence, its market share outside the U.S. is surprisingly small. When it comes to the highly competitive wireless and electronics industry, companies need to think globally more than nationally. So far, Verizon has not done that. Verizon's new products and innovation, for which it was rewarded, is a constant risk. Research and development dollars can, but not necessarily will, pay off in new lines of revenue. Verizon's award for innovation was a good step, but undue optimism about new technology can end up hurting investors. Legal regulations, technical development, proper marketing and consumer reaction can all conspire to eliminate payoff from innovative research.

Verizon is set to do well. Despite recent dips in earnings and related data, the company has savvy management. Insider opinion is also mostly positive. Verizon's current performance metrics, key ratios and anticipation of market demand all merit a "Buy" recommendation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.