Is Verizon Primed For Growth?

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. Fresh off a crucial bounce off of the 200 day moving average, I would like to pinpoint on one of the largest  telecommunications companies in the world, Verizon (NYSE: VZ).

<img src="http://stockcharts.com/c-sc/sc?s=VZ&p=D&b=5&g=0&i=t26046949348&r=1355083377254" />
 

Strengths:

  • Dividend: Currently, Verizon pays out quarterly dividends of $0.51, which annualized puts the dividend as yielding 4.64%
  • Solid Revenue Growth: In 2007, Verizon reported revenue of $93.5 billion; in 2011, the company raked in revenue of $110.9 billion, representing year over year annual growth of 4.36%
  • Sheer Magnitude: The company is valued at $126.74 billion on the market, and possesses a wide-reaching and massive customer base, this diversification should benefit the company in the long-term
  • Effective Business Model: The company provides communications, information, and entertainment products and services to its customers, and is able to derive consistent revenue from each one of these segments, as their customers usually lock into multi-year contracts

Weaknesses:

  • Debt: Currently the company possesses about $41.5 billion of debt on its balance sheets, a major negative to the business
  • High Valuation: Verizon currently carries a price to earnings ratio of 41.40, which is more than double the S&P 500 average, additionally the company possesses a price to book ratio of 3.50; however the company price to sales ratio is more reasonable at 1.14
  • Microscopic Margins: Currently the company possesses a net profit margin of 2.17%, which leaves little to no room for an error in execution
  • Sliding Earnings and Margins: In 2008, Verizon reported earnings per share of $2.54; in 2011, the company reported earnings per share of $2.15, and each year since 2008 the company’s earnings have slightly fallen, despite rising revenues, signaling a significant deterioration in margins (Net Profit Margin: 2008 6.6%, 2011 2.2%)

Opportunities:

  • Dividend Growth: Verizon has consistently boosted its dividend payouts , from 2000 quarterly payouts of $0.385, to current quarterly payouts of $0.51, representing year over year annual growth of 2.26%, and further dividend growth is highly anticipated
  • FIOS Video Expansion: FIOS video is one of Verizon’s newer products, and has grown substantially over the past few years, from 2.8 million subscribers in 2009, to 4.2 million subscribers in 2011, and this accelerated growth is projected to continue into the future as Verizon makes this services available in more areas
  • Cloud Technologies: Verizon has implemented a technology that allows customers to sync information between devices, which not only improves the customer experience, but also encourages the adoption of the entire Verizon ecosystem; internet, television, and communication
  • Acquisitions: In August 2011, Verizon acquired CloudSwitch, which allows enterprises to move workloads between company data and the cloud, and further acquisition should fuel future growth and allow Verizon to offer innovative features  

Threats:

  • Competition: The telecommunication industry is an extremely competitive one, with hundreds of companies fighting to offer the best product for the least amount of money
  • Maintenance of Ecosystem: Verizon possesses one of the largest telecommunications ecosystems in the world, with thousands of towers, which constantly have to be replaced or upgraded to be able to withstand newer technologies, such as 4G LTE, and more people; this never-ending cycle of upkeep allows Verizon to offer an innovative product but costs millions
  • Sluggish Economic Landscape: Verizon’s products and services come at a steep price, and continuing sluggishness in the economic landscape could cut into Verizon’s profits
  • Increase in Dividend Tax: If a deal is not achieved by January 1, 2013, dividend tax rates will increase from 15% to 43.4%, which could significantly hurt Verizon as one of the main reasons investors are in Verizon is its dividend  

Competitors:

Major publically traded competitors of Verizon include AT&T (NYSE: T) and Sprint (NYSE: S). AT&T is substantially larger than Verizon in term of market capitalization, and competes directly with Verizon in the telecommunications industry. AT&T possesses a dividend yielding 5.34%, and also possesses a price to earnings ratio north of 40. Sprint also competes directly with Verizon, however pays out no dividend.

The Foolish Bottom Line:

Verizon is a financially solid company with growing revenues; however the company holds a huge debt load and has experienced a sharp decline in margins over the past years.  If the dividend tax rate was to increase, there would be a mass exodus from the stock which could lead to lower prices. However, the company does possess a growing customer base and massive dividend. Over the long-term Verizon should prove to be a good investment, however in the short-term the company faces major uncertainty.      


makinmoney2424 has no positions in the stocks mentioned above. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus