In this article, we focus on Verizon (VZ) as the fourth company to discuss in this series on high-yielding equities. Here, we will attempt to capitalize on the freshness of the sector and industry notes that were covered in my prior article on AT&T (T).
From reading other articles in this series, you should have noticed that any mention of "Ratings" was missing! You will see that within the capital preservation section of these articles, I did not address whatsoever Rating Agencies' ratings! Similarly, my discussions of company prospects did not refer to Financial Analysts' ratings!
How dare I discuss financial viability of companies without mentioning Rating Agencies' ratings? Well a good question that would have had no good answer, if it were not for witnessing and surviving the Financial Crisis!
Effectively, such agencies have failed the investing public.
Was it malice? Actually, it does not make a difference. You see, for an outside observer, such as you and I, malice and gross incompetence are indistinguishable!
Hence, instead of relying on rating agencies, you are better off resorting to Credit Default Swap spreads (CDSs) for the true market opinion of the companies. Similar to charting and technical trading, CDSs tell you what people are "doing" and not what they are "saying!" It is the "doers" that you need to take notice of and not the "sayers" -- or Ratings Agencies.
As for financial analysts and investment bank opinions, you may want to check my latest article on Geron to have a hint of what I think of those. For instance, in the news at this time is the BlackRock analyst probing issue, which is still current more than two weeks after announcing a settlement. Such issues are enough to convince me that years of regulation have not reined in the professional analyst community. Effectively, on this front, you are better off doing your own homework, including incorporating issues raised by such analysts. If that, as I mentioned in the article on AT&T, means studying a management consulting firm's technical opinions intended for chief technology officers of telecom companies, then be it. Protecting your money is worth your time!
For a recent case in point, read Goldman Sachs's (GS) recommendation of buying J.C. Penney's (JCP) debt in September of 2013 and compare it to the recent CDS spreads and you may agree with my stance of following the "doers" not the "sayers."
Investors who put their hard-earned money in the market, can never escape the need to do own homework by conveniently relying on someone else -- myself included -- to spoon feed a, possibly, off-handed opinion.
Before we embark on the specific discussion, you may wonder why would one trade two very large companies in almost the same space and of (almost) the same size? Diversification is good, but in this particular case it is also technology diversification. You see, VZ and T use completely different technologies for their most prized business: Wireless. VZ has opted for the (mainly) USA standard, which is CDMA, while T employs the GSM international standard. As such, if you are viewing these companies as 30-year bonds, then you have to understand that they have two competing technologies. If one technology suffers a setback for one reason or another, then that would have a severe impact on the business of that particular company.
Verizon, at the time of writing is a $136 billion company in market cap that is yielding 4.45% in annualized dividends yield, due to its $0.53 quarterly payout. Impressive numbers considering that the 30-year bond is now yielding 3.68%. The company, ancestry wise, is a sibling of SBC (the current AT&T), as it used to be Bell Atlantic, the second most ferocious daughter of "Ma Bell," the old AT&T. To complete the historic perspective, if you remember any of the names GTE, NYNEX, WorldCom or MCI, then you are now talking Verizon -- yes, the last two names do evoke deep memories and feelings!
The structure of the company "was" a bit more complex than that of AT&T, given that Verizon Wireless, VZ's most valuable business, was actually a partnership with Vodafone (VOD). This will be shortly resolved, as VZ agreed to acquire VOD's share of the wireless business, in a transaction that is supposed to close this quarter.
As far as management is concerned, the board of directors strikes me as diverse but not very well-versed in the telecommunications business per se. Yes, many seem to have served for long time in VZ or some of its predecessors, though. One may argue that, at least for the large wireless and consumer interests of the company, having a diversified board has its merits.
Yet, the reason I raise the issue is that, on the flip side, Verizon executive management is very much well versed in the business. Actually, they all seem to be the prodigies of the company. In essence, if you are a board member, it would be extremely hard to second guess any member of this highly competent executive group when it comes to core business.
I normally want to see an activist board that is comfortable with all aspects of the business, including some of the core concepts and technologies, and I am not sure I see that here. After all, MCI-WorldCom is in the ancestry line of the current Verizon, and that is a story that one does not want to repeat.
Something to the credit of the VZ management is that executive compensation is far more reasonable than their AT&T rivals.
To close this issue, please note that insiders in VZ did not buy any shares in the last 12 months. Yet, in reality, they were not that active. The net was disposing of around 325k shares with only 15 sells in that period. Compared to their AT&T rivals, that group had 186 transactions for a net disposal of around 82k shares.
Examining the dividend history puts much of these concerns to rest, as the payout increased every year since 2007, including after the Financial Crisis.
As we dig into the finances, by examining the latest SEC filed report --the Q3-2013 quarterly report -- we look for exceptions more so than regularities. After all, for such size companies, it is the untidiness that you look for and not the headline numbers that are almost assured to be in order. Admittedly, this whole effort needs to be repeated once Verizon Wireless is fully integrated.
One such item is that VZ lists its wireless licenses (page 4) as worth $20 billion -- almost 40% -- more than AT&T. Yet, total goodwill and intangible assets are listed around $30 billion, a much better number than their rivals. Here note that VZ, just like its rival, has around 60% of its property depreciated. This is of concern considering the high rate of technical evolutions in this business.
For VZ, total long-term debt was around $90 billion -- more than its rival -- and double what it was for VZ a year earlier. On page 5, you realize that the company has executed a $49 billion financing transaction during 2013.
Once I see borrowing for a company with such a high dividend, I have to check the cash flows (page 5) to make sure that the dividend payout was not covered by debt. This seems to be on the safe side in this case.
On page 18 of this report, you tend to see how this telecom business is shaped. You note that the wireless business, and for retail, is in reality the bulk of the business, and is growing at an impressive 8% and contributing 2/3 of the revenue. This is the nature of the "modern telecoms beast" and this is something for you to internalize as you make investment decisions in this sector.
In short, I cannot find any serious red flags or cause of concern from my examination and comparisons to warrant concern about the "capital preservation" of this company.
As for prospects, the issues that face the sector as a whole, which we discussed in the earlier AT&T article, do apply equally for Verizon. In particular, the paradoxical continual existential challenge for such behemoths should always be present in your mind as an investor. Whether it is disrupting technologies, out-of-the-blue competitors, or regulations, telecoms are subjected to continual threats to their very existence.
Yet, one exciting aspect of the future of this particular company is the impending full takeover of the Verizon Wireless business -- to be concluded this quarter. Given what the financial statements revealed regarding size and growth of the wireless business, VZ seems to have a good chance at getting an invigorating growth infusion in coming quarters, notwithstanding the typical merger, consolidation and acquisition risks of course.
If we look at the 10-year monthly chart of VZ -- which, I have plotted it against T -- you will notice that the company actually did well relating to capital appreciation, an unsought bonus for such a high yielding company. In effect VZ did recover well above the pre Financial Crisis levels, and is showing decent stability in 2013, given the rising interest rate environment and the "return of risk" to the market.
Further, the charts reveal decent periodic mean reversion pattern, with no alarming separation between the stock price and the slowest moving averages.
Before I attempt to discern a good entry point in the stock, I would have to remind you of the age-old edicts of "do not catch a falling knife" and "the rising tide raises all the ships." In essence, given the current market activity, I would be concerned about adding to holdings, unless it is based on some periodic or pre-set averaging/investing scheme. My usual practice is to average on the way up and never on the way down.
As such, if we look at the 3-year weekly chart, you can clearly see a decent comforting pattern, with no obvious technical concerns.
To rehash, VZ is an investment grade company, in the notoriously volatile telecoms market sector. There is an impending transaction that will affect both accounting and operations significantly in the form of the takeover of Vodafone's portion of Verizon Wireless. The typical caveat about caution relating to market conditions applies, including the still, overall, rising interest rate environment and the ongoing "consolidation" -- which is too early to tell if it will evolve further at the time of this writing.
Notwithstanding this overall market risk (call it beta-risk), the company presents itself as a decent investment at this point of time with a decent upside potential -- a bonus for such a high yielding investment.