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Summary

  • Company managed to grow margins and maintain market share despite competitive nature of industry.
  • Margins further set to benefit from cost cutting and strategic initiatives.
  • 4.45% dividend yield makes stock attractive for dividend seekers.

I reiterate my bullish rating on Verizon (NYSE:VZ); the company reported strong performance for the recent first quarter of 2014. With best-in-class 4GLTE services and broad range spectrum, the company maintained its healthy revenue stream, generating a 4.8% year-on-year increase in 1QFY14 revenue. However, its subscriber base faced headwinds in the highly competitive Telecom Sector, thereby observing a bit of stress on subscriber additions from both wireless and wireline segments. The company's cost saving initiatives, like the lean six sigma plan, coupled with the EDGE program contributed well towards expanding the margins in the recent quarter. Moreover, improving revenues and expanding margins fueled operating income growth and double-digit EPS growth in the recent quarter. Furthermore, the stock remains an attractive investment option for dividend-seeking investors, as it offers a healthy dividend yield of 4.45%, backed by its solid cash flows.

Continued Strong Momentum

Benefiting from best-in-class 4G-LTE and broad range spectrum, VZ reported top-line revenue growth in its first quarter results for 2014. The wireless segment, the main source of VZ's competitive edge over its peers in the highly competitive sector, continued to deliver healthy results. The company's attractive portfolio of spectrum, smartphone penetration and 4G-LTE coverage of 305 million POPs resulted in a 6.9% year-on-year increase in total wireless revenues and ARPU growth of 1.2% year-on-year.

In addition, the company's wireline segment, despite the secular changes of a consumer shift towards wireless, has been doing well to moderate revenue losses for the segment; the segment experienced a revenue drop of (0.4%) year-on-year in 1Q2014, in contrast to a (1.2%) year-on-year drop in 1Q2013. I believe VZ will continue to improve its revenue base in the coming quarters, with its strategic investments in network technology enabling it to deliver reliable, high quality services and solutions to customers, small businesses and enterprise customers.

However, the company did face pressure on its subscriber base in the recent first quarter, both in wireline and wireless segments, due to intense competition within the industry. The following table shows the comparison of revenues and operational metrics of VZ for the first quarter of 2013 and 2014.

Wireless Segment

1Q'13

1Q'14

Revenue (Y-O-Y Growth)

6.8%

6.9%

ARPU (In $)

48.32

48.91

Net Postpaid Subscribers Additions (In 000's)

677

539

Wireline Segment

1Q'13

1Q'14

Revenue (Y-O-Y Growth)

(1.2%)

(0.4%)

ARPU (In $-Millions)

107.94

120.17

Broad Band Subscribers Additions (In 000's)

99

16

Source: Company's Quarterly Earnings Report

Moreover, the company's adjusted EPS increased to $0.84 in 1Q2014, up from $0.68 in 1Q2013, mainly driven by strong wireless segment revenues and a strong demand for FiOS services. The company also managed to beat analysts' EPS estimates by 4.60%. VZ's future plans of growing its earnings through 4G-LTE expansion and smartphone penetration will portend well for the company's top and bottom line results. Analysts have also estimated a healthy next five years growth rate of 6.6% for VZ. The following graph shows EPS growth over the last five quarters for VZ.

Source: Company's Quarterly Earnings Report

The company has been doing well in expanding its margins through cost cut initiatives, as in 1Q2014 the company reported an EBITDA margin of 36.7%, up 9.3% year-on-year. VZ's management has been effectively improving cost structure to drive operational efficiency and the productivity of its entire business through its "Lean Six Sigma Plan". Moreover, the company is on track to delivering more operational efficiencies in the coming years. I believe the company's cost cut initiatives, strategies to address competition and strong FiOS demand will remain important stock price drivers for VZ. The following chart shows the EBITDA margin trend for VZ.

Source: Company's Quarterly Earnings Report

Solid Dividend Yield and Leverage Balance Sheet

The company has been consistently growing its dividends over the years, despite the competitive industry environment and high CAPEX. The company currently offers a healthy dividend yield of 4.45%, backed by its cash flows. I believe dividends offered by the company are safe, despite the high CAPEX needs to support its long term growth initiatives. In the recent first quarter, the company experienced a 23% quarter-on-quarter drop in free cash flows, mainly due to a 15% quarter-on-quarter increase in CAPEX to finance long term initiatives, which I believe will strengthen VZ's long term operations and performance. The following chart shows FCF and dividends comparison for VZ over the recent five quarters.

Source: Company's Quarterly Earnings Report

The company has a leveraged balance sheet, which remains a concern for investors; VZ has a debt-to-equity of 2.31x. Nonetheless, the company has been aiming to lower its debt and strengthen its balance sheet. Also, the company is scheduled to repay debt in the near future, which will improve the company's debt-to-equity and risk profile. The following chart shows VZ's long term debt maturity profile and credit rating assigned by credit rating agencies.


Source: Verizon.com

Conclusion
VZ has been doing well in the recent past to improve its operations and financial performance. The company has strongly positioned itself in the competitive industry, managing to grow margins and maintaining its market share. I believe the company's margins will further benefit from its cost cutting and strategic initiatives. Also, with its strong solid subscriber base, the company is set to benefit from long term growth opportunities. Moreover, the stock remains an attractive investment option for dividend investors, as it offers a dividend yield of 4.45%. Due to the abovementioned factors, I am bullish on the stock.

Source: Cutting Costs Remains The Highlight In Bullish Case For Verizon