In the world of investing there are growth stocks and there are income stocks. While it is not impossible to balance the two, it certainly proves to be a difficult task for many. McDonald's (MCD), for example, has managed to consistently grow earnings while maintaining and growing a sturdy dividend for its shareholders.
For a long time, since Q3 of 1987, Verizon (VZ) has managed to pay back its shareholders with a quarterly dividend. During this same time it has managed to make strategic acquisitions and grow the company from a basic operator of telecommunication land lines to one of the premiere wireless providers. Another significant portion of Verizon's revenue stream is attributed to its FiOS high speed internet and cable service. The company of late has been expanding its fiber optic network to take on rival competitors such as Cablevision (CVC), Time Warner (TWX), Comcast (CMCSA) and DISH Network (DISH).
To this point Verizon's strategy has proved fruitful for the company and shareholders, however, recent actions make me wonder whether or not the company is beginning to morph from being a balanced growth and income stock, to a more growth oriented stock. The company has partnered with Coinstar (CSTR), operator of the Redbox kiosks, to start a joint venture in streaming media content. The JV, which Verizon has a 65% stake in, is to have both physical delivery and downloadable content through Verizon's existing network. This all sounds like the plans for a growth stock to me, which raises the question, "Will Verizon's dividend be in jeopardy?"
To some this will sound like an absurd question to raise, but long-term investors do need to consider the effects such a venture could have on the company's financial stability. While Verizon maintains an ultra conservative cash position ($13.954 Billion), it will likely need to dip into this reserve pool to acquire enough streaming content to rival Netflix (NFLX). Failure to do so could only lead to an underfunded JV with limited content and ultimately, disappointment.
The joint venture however is not the only thing threatening to burn through VZ's cash horde. As the most recent quarterly results have shown, acquiring the Apple (AAPL) iPhone has been a costly venture for the wireless provider. The company, footing the majority of the bill to put the iPhone in the customers hands who sign on to a two-year subscription, had its bottom line hit with a 10% increase in postpaid phones (those subsidized by Verizon for customers signing long-term contract agreements). With the iPad 3 rumored to be released in the coming months and an iPhone 5 set for possible release in the fall, Verizon may be eating the bill on a few million more devices.
Don't get me wrong, I am by no means at all saying to dump your Verizon stock tomorrow because of recent expenditures. What I am suggesting though is that maybe we should consider thinking about Verizon more in the sense that it is a growth oriented company than it is income oriented. I believe the company will continue to deliver an excellent service to its customers and strong quarterly results for shareholders. As for the dividend, I don't see any near-term threats, however that would have to be reassessed later this year once the JV begins rolling out.
Verizon Earnings by Quarter
(Click to enlarge)
Chart and Data obtained through TDAmeritrade.
Disclosure: I have no position in VZ for my personal accounts however manage accounts that do hold VZ as part of their portfolio.
