Is Verizon a Good Investment?
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Verizon Communications, Inc. (NYSE: VZ) closed at $43.95 on Friday evening, close to its 52wk high of $44.14 and around its approximate fair value. It has an average P/E ratio of 17.58 against an industry average of 151.22. Based solely on the P/E ratio, Verizon appears to be overvalued. The telecom sector has also been recently labeled as "near overbought" by Bank of America. If you’re a contrarian like me, you would want to sell your Verizon stock first thing Monday morning. But hold that thought and hold your stock!
Steve Jobs wanted to have an exclusive telecom network for Apple. He gave up his idea back in 2007 after realizing that breaking through a strong duopoly would be next to impossible. I’m talking about the two telecom networks that monopolize the American market today, Verizon and AT&T (NYSE: T).
The two leaders sit near the top of the 2011-2012 ranking of the most valuable telecom brands in the world, with AT&T taking second place, followed by Verizon at third. What makes the two stocks even more interesting is their industry positioning. The telecom sector has outperformed all the remaining nine sectors of the S&P 500 index over the last 3 months. In fact, the S&P 500 Telecommunication Services Sector Index has seen a year to date gain of 11.89%. The sector remains defended against economic strife simply because of increasing user base and current customers not wanting to cut back on their usage.
In the ensuing discussion, I’ll keep my focus on Verizon. Stay tuned for more on AT&T!
Verizon, a Dow 30 company, has 24.1 million wireline connections, 92 million wireless customers and approximately 16 million additional devices on its network as of December 2011. Verizon was the first company to offer LTE (Long Term Evolution) network in late 2010, followed by AT&T. The company recently extended its 4G LTE network with the addition of 46 new markets to reach a total of 304. By expanding its service in 22 markets where it already had a presence, Verizon has claimed the largest current 4G LTE network. A smaller but growing competitor Sprint has plans to start a network this summer.
According to Verizon, 47% of its postpaid subscribers owned smartphones by the end of the first quarter, as opposed to 43.5% in the same quarter last year. Verizon presently offers 24 LTE smartphones and tablets, including the latest Samsung Galaxy S III. All telecom providers have seen a greater increase in wireless subscribers in contrast to wireline, with the demand for smartphones especially high. I checked Sprint’s website and found that Samsung Galaxy S III is out of stock on preorders. With the launch of iPhone 5 expected this year in October, the new Samsung Galaxy S III out, and Verizon’s Share Everything data plans expected to be launched on June 28, the number of smartphone users for Verizon are also expected to increase by year end.
The company was able to secure an EBITDA service margin of 45% in its wireless segment for FY11 which was the best in the industry, even with high handset subsidies.
According to last year’s annual consumer satisfaction survey, Verizon ranked as the best service provider, followed toe-to-toe by Sprint.
The almost finalized acquisition of Hughes Telematics expected to close in Q3 of 2012 will also help Verizon integrate vertically in automotive and fleet telematics markets, including emerging machine-to-machine (M2M) services applications, thus bringing diversification to the company.
Most telecom providers, including AT&T, hold a strong cash position to continue their current dividend payouts. Verizon has been increasing dividend payout over the years, paying out more in cash than what it made in revenues. Dividend payout has increased from 60% in FY05 to over 230% in FY11. In recent months, two telecom providers Alaska Communications (NASDAQ: ALSK) and Frontier Communications (NASDAQ: FTR) have cut their dividends for further expansion.
Verizon is also expected to witness work force reduction benefits, including a reduction in pension plan expenses. The number of employees has decreased over the past three years, from 194,400 in 2010 to 191,800 in Q1 2012.
Some dislike the company based solely on ethical grounds. It is true that Verizon was found guilty of overcharging its users in the past, but it later claimed to refund the charges. It also recently settled a whistleblower lawsuit, paying $93.5M in settlement for overcharging government. Furthermore, Verizon used conservative estimates to evade taxes in the past. The arguments are legitimate. Nonetheless, my support for the company is based on its operations and prospects within its sector. If the ethical issues don’t bother you, Verizon is one stock you would want to hold in the long term because of a strong dividend yield and expected price appreciation from sector stability. Adage Capital, Cliff Asness’ AQR Capital, and billionaire Ray Dalio’s Bridgewater are also bullish about Verizon (see Ray Dalio’s new stock picks).
This article is written by Palwasha Saaim and edited by Meena Krishnamsetty. Meena has long positions in T and FTR. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.