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Reviewing Verizon

Feb. 25, 2019 3:50 AM ETVerizon Communications Inc. (VZ)19 Comments
Callum Turcan profile picture
Callum Turcan


  • Verizon Communications Inc. posted tremendous operating and free cash flow growth last year.
  • Dividend payouts were fully covered by free cash flow in 2018.
  • Analyzing Verizon's 2018 financial performance, its Oath impairment charge, and its restructuring plan.

Telecommunications giant Verizon Communications Inc. (NYSE:NYSE:VZ) yields 4.2% as of this writing and is generally viewed as an income growth investment. From the middle of 2013 to the end of 2018, Verizon Communications Inc.’s quarterly payout has risen by 17%. This space is tricky to navigate as the telecommunications business is capital-intensive, most of these firms already have large debt loads, and a large portion of the operating cash flow telecommunications firms generate is paid out to shareholders. The idea is that due to the relatively stable nature of Verizon Communications Inc.’s cash flow, debt can be used to finance a large portion of its capital expenditures and/or dividends as it effectively is a utility company. Last year, for the first time in a while, Verizon Communications Inc. was able to fully cover both its total dividend payments and capital expenditures with net operating cash flow. Let’s dig in.

Verizon Communications Green BondSource: Verizon Communications Inc.

Revenue and earnings overview

Verizon grew its revenue by 4% last year on a year-over-year basis to $130.9 billion, largely due to its Wireless equipment revenues jumping by 18% to $22.3 billion. Unfortunately, Verizon’s operating margin dipped from 21.76% in 2017 to 17.02% in 2018, but that needs to be taken with a grain of salt. Last year, Verizon recorded a $4.6 billion goodwill impairment charge relating to its Oath division (which is now Verizon Media). That played a key role in boosting Verizon’s operating expenses by $10.0 billion, or 10%, y-o-y in 2018. Remove the goodwill impairment charge and Verizon’s 2018 operating margin improves to 20.53%, but that is still 123 basis points below its 2017 operating margin.

The Oath impairment charges stems from the Yahoo-AOL merger, under the Verizon umbrella, not yielding promising results. Management seeks to shave billions in annual expenses from Verizon’s cost

This article was written by

Callum Turcan profile picture
Worked as an equity analyst for several years in the USA and have been writing financial articles and analyzing publicly traded companies for more than a decade.

Analyst’s Disclosure: I/we 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.

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Comments (19)

Writing off $4 billion because of dumb acquisitions basically drives me crazy, but since everyone in their industry or related to it does the same thing, one has to accept some level of it or simply not own anything in several sectors. I do get the impression that VZ may have learned its lesson to some degree, and will resist paying for synergies and strategic opportunities they hope will exist. It was not a mistake by some former group of ousted management, the current management was all part of it. It is not obvious that T has figured this out yet, but they are clearly on different strategic directions
It will be interesting to see whether VZ or T's strategy are successful going forward. They are very different.
Callum Turcan profile picture
@carlson73 When it comes to large write-downs, hindsight is 20/20. Often these deals look great at the time, but the expected synergies or growth potential don't materialize, so the company is forced to reevaluate the economic potential of those assets. This is why tech acquisitions, where intangibles represent a large portion of the takeout price, are dicey.
Kraft Heinz just announced the same thing-a company whose junior owner is Warren Buffett/Berkshire Hathaway.

I believe it’s time for shareholders of the future to adopt the Nancy Reagan mantra: just say no.
ronald61239 profile picture
When layoff's occurs in union shops, it's usually done by seniority. Co.'s will often offer incentive or retirement packages for white collar, older employees.
Callum Turcan profile picture
@ronald61239@outlook.com Often companies want employees with what some could see as "proprietary" knowledge of the firm's internal workings to go peacefully.
ronald61239 profile picture
I know of times, Experience help that were laid off, then rehired as consultants. I'm sure there are many exception to rules.
Unfortunately, most of those people are taking the buyout, because if they don't they will likely be forced out at a later date. I'm never fond of a company that eliminates quality people that have been an asset for many years, just to make their numbers work.
harris2, maybe that's an inaccurate assumption. Maybe they are getting rid of mostly dead weight.
Callum Turcan profile picture
@harris2 Massive layoffs are a gamble when it comes to losing employee talent.
Callum Turcan profile picture
@jimoc The ability to hire and fire people at will is an essential part of America's corporate culture in terms of operating expense flexibility and the ability to quickly adjust to changing market dynamics, but when laying over 10,000 people off, there are bound to be workforce talent losses that reflect the indirect costs of such a move, as well as employee morale losses for those that stay on.
dunnhaupt profile picture
Sounds plausible, but why are the analysts so skeptical, with most of them coming out slightly on the down side?
Callum Turcan profile picture
@dunnhaupt The 5G roll-out in America will come with plenty of operational hurdles (making sure its new towers and the related infrastructure are fully functioning and operating at a high utilization rate) and finance-related concerns (getting Americans to pay up for faster mobile data connectivity isn't a sure thing, even if the utility of faster upload/download speeds is quite apparent), but in the end it looks like a clear winner once things really get underway by the early-2020s.
I am very bullish on VZ Should lead way on 5G Finances look great!! Good article
Callum Turcan profile picture
@mjrein Glad to hear you enjoyed the piece!
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