Verizon Will Leap Ahead Of Peers In 2013
Bobby is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In good times and in bad times, there are certain things that we just can’t live without. A few obvious examples come to mind including food, clothing, a place to live, our mobile phone. Wait, our phone? Sure, even if we’re out of work and down to our last couple of bucks, we’ve got to keep our phone so that we can take the call when a job offer comes through. In this day and age, no one can afford to be out of communication.
As the number one phone and wireless provider in the country, Verizon (NYSE: VZ) is in the sweet spot when it comes to demand for its services. Not only does it have the best coverage of any carrier, but the company's customer service numbers are surprisingly high for an industry that typically gets bad marks. But the question that investors want to know is whether Verizon stock is a worthwhile investment. Let’s look at some numbers, shall we?
Comparison
Verizon competes in the land line, broadband services and wireless space with really only two other major players, AT&T (NYSE: T) and Sprint-Nextel (NYSE: S). T-Mobile, owned by the German giant Deutsche Telecomm, offers only mobile service in the US and is the 4th largest carrier behind these three. In terms of subscribers, Verizon is on top with around 108 million wireless subscribers and 145 million overall customers. In second place is AT&T with just over 100 million wireless subscribers and around 110 million overall. Rounding out the group is Sprint with 53 million and T-Mobile with 33 million wireless subscribers.
When looking at comparison numbers for telecom service providers, it’s worth digging a little deeper than just the subscriber count. For example, how much does it cost the company to operate? And is the total revenue count per customer growing or dropping? Verizon is ahead of the pack on both of these metrics. The gross margin for Verizon is currently at 58.63%, compared with AT&T at 54.73% and Sprint at 43.54%.
As for the All-important average revenue per user (ARPU) number, Verizon continues to pull ahead there as well. At $54.89, its ahead of AT&T at $47.70, Sprint at $48.57 and T-Mobile at $46.22. Finally, Verizon continues to grow revenue at a faster clip as well, coming in at a 7.7% rate last quarter compared with AT&T and Sprint at 3.6% and 5.1% respectively.
Positives for the Stock
New contract customers are the life-blood of a telecom provider. In 2011, Verizon began offering Apple’s (NASDAQ: AAPL) iPhone on its network. In the two quarters following, new subscribers jumped by more than 2 million. That’s compared with AT&T gaining 875,000 new customers during the same period. In the 4th quarter of 2011, Verizon sold 4.2 million iPhones, more than doubling AT&T sales.
Verizon continues to pump money back into its network as well, expanding its coverage area and increasing the overall speed and reliability of its network. When it comes to a customer’s satisfaction with their wireless carrier, the number one factor is coverage. With the continued investment, Verizon is ensuring it maintains its lead as the best-ranked carrier in customer satisfaction.
In 2011, Verizon’s free cash flow was $13.5 billion. In addition to plowing much of that back into the network, Verizon pays one of the highest dividend rates of any blue-chip stock. The dividend currently sits at 5.4% annually, with shares at around $37 apiece. This is an attractive payout for a company that is growing revenues in the high single digits and expects to keep increasing its dividend each year.
Risks
Both Verizon and AT&T, in their contracts with Apple to sell the iPhone, are offering subsidies to customers who purchase one. If you were to go out and buy an iPhone without a plan, it would likely cost you around $700. In order to stay competitive, Apple requires the carriers to sell the devices for around $300, about what you’d pay for an Android smartphone. As such, both AT&T and Verizon lose money on every one they sell. Of course they do make money on the service plan, but this seems like a bit of a desperate business model.
Slowing growth in its customer base is another threat to the price of Verizon’s stock. Gone are the days of double digit year-over-year growth rates and high fees for data services. The network has become ubiquitous. When the FCC put in place the rule that allowed a customer to take their number with them when they changed carriers, the big wireless carriers lost the majority of their pricing leverage. What’s left is little more than a commodity service.
A final consideration is the performance of the stock market itself. After a period of risk aversion, investors seem like they may be willing to take more of a gamble on stocks with high growth potential, for a greater return – the risk-on trade. Well, Verizon is not even close to a growth stock anymore. The advances of 2011 were somewhat of an anomaly, and Verizon had been viewed as a “safe” bet, with a dividend to cushion any blows. Now that investors are once again looking for growth, The stock may lose its appeal.
For anyone considering a somewhat secure investment with a handsome dividend, there are few better places to look than Verizon. This is a stock similar to the utility company investments of 4 or 5 decades ago. Strong and steady, without the volatility of the average tech company. A stock that you can own in your retirement account and still sleep at night. If you’re an active investor, consider picking up shares when the broader market pulls back and offers a buying opportunity in Verizon. This may be the closest to a set it and forget it stock that you’ll find.
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