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Summary

  • Verizon Communications posted solid growth in the previous quarter, setting the stage for a strong performance going forward.
  • Verizon is making solid investments in the business to upgrade its network and provide better services to customers in order to compete with AT&T.
  • Verizon's fundamentals are strong, and the company can continue increasing its dividend in the future.
  • Verizon's expected earnings growth rate for the next five years is better than AT&T.

Telecom giant Verizon Communications' (NYSE:VZ) first-quarter results reported in April have breathed new life into the stock. After a patchy start to the year, Verizon has gained around 7% since releasing results. The company reported the fifth consecutive quarter of double-digit operating income and earnings growth, driven by the acquisition of its Verizon Wireless stake from Vodafone (NASDAQ:VOD). Moreover, with the moves that the company is making, it should be able to sustain its growth momentum despite competition from AT&T (NYSE:T).

Let's take a look at Verizon's prospects and see why it is a solid long-term buy.

Solid growth

Verizon is seeing robust growth in wireless contracts and residential broadband Internet. In eight of the last nine quarters, the wireless communications giant has posted double digit growth in net income. Also, because Verizon now has full ownership of Verizon Wireless after purchasing the remaining 45% stake from Vodafone, it should be able to boost its sales going forward on the back of integration synergies.

Verizon is making consistent investments in its network and platforms to support its products and services. The telecom giant is looking to deliver high network quality and reliability to offer a rich customer experience.

Investments to drive growth

Verizon is bolstering its 4G LTE platform as customers are interacting with the world via next generation apps, devices, and solutions that run on high-speed networks. In addition, Verizon is investing aggressively in its wireline segment too, and this has helped it improve its services, applications, and solutions in FiOS, global IP, security, and cloud services. The company believes that these strategic investments will result in higher efficiency and decrease costs. Moreover, Verizon is concentrating on improving productivity and efficiency by applying lean six sigma principles.

The company's efforts have delivered positive results. For example, FiOS, which uses Verizon's fiber optic network to send and receive content and data, gained 98,000 new Internet customers and 57,000 TV customers in the previous quarter. Revenue from FiOS rose 15%, surpassing $3 billion for the first time, and the company expects it to grow further in the coming months. Verizon FiOS had 6.2 million Internet customers and 5.3 million cable TV connections at the end of the first quarter.

The company currently has a total of 5.3 million FiOS Video subscribers, representing 35% penetration in this segment of the business.

Verizon has also entered into an agreement with Intel (NASDAQ:INTC) to buy media assets that will help the company further develop its Cloud TV product and services. Verizon will purchase the intellectual property rights and other assets that Intel has in its cloud platform. This move will help the company to provide its customers with video services integrated with Verizon's FiOS fiber-optic-networks, and also with additional over-the-top services. This is certainly a well-measured strategic initiative that Verizon has taken, as it will help it improve its competitive position in the market.

Better than AT&T

Such investments by Verizon are necessary as AT&T is aggressively investing in its network and enhancing its LTE service. As reported by Gigaom earlier this year:

"At CES on Monday, AT&T announced a new batch of new LTE markets, but what it didn't mention is it crossed over the 500-market mark, putting it nearly on par with arch-rival Verizon Wireless in terms of LTE coverage.

I say "nearly" because while AT&T is now in just as many cities and towns as Verizon when it comes to its LTE footprint, it hasn't quite matched it in total population covered. While AT&T's network touches 270 million people, Verizon's reaches about 300 million, reflecting Verizon's tendency to reach farther outside of a city to cover surrounding areas.

Still, AT&T doesn't appear to be done with its 4G expansion, while Verizon has pretty much concluded its rollout. We're likely to see AT&T add more cell sites and possibly even more markets to its footprint in the coming months."

However, Gigaom also reports that Verizon is upgrading the capacity of its LTE network, and this should allow it to stay ahead of the competition.

Fundamentals and final words

Verizon has seen strong and robust growth in its cash flow. Its cash from operations in the last twelve months stands at $38.8 billion. Free cash flow stands at $21.78 billion. The company also has a total of $3.54 billion of cash in hand. This should allow the company to invest it in networks aggressively, and purchase spectrum for future growth.

In addition, Verizon has a strong dividend yield of 4.30%, and the payout ratio is quite reasonable at 47%. Since Verizon is generating a huge amount of cash flow and is also adding a good number of subscribers for its services, it should be able to increase its dividend going forward.

Verizon currently trades at a trailing P/E of 11, which makes the stock a good buy against its peer AT&T. AT&T's earnings are expected to grow at a CAGR of 5.6% for the next five years, which is lower than Verizon's expected rate of 6.1%. So, investors should consider an investment in Verizon as it looks set for long-term growth.

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

Source: 4 Concrete Reasons Why Verizon Communications Is A Solid Buy