Now is a Good Time to Open a Long Position in Verizon
Muhammad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Verizon (NYSE: VZ) got beaten up pretty badly in the month of August without any particularly foul news. In fact, during August there were two significant news items that should have lifted the telecom stock.
First, there was news of FCC approval of a deal purchasing a huge chunk of unused bandwidth from SpectrumCo., and the second disclosure was related to the new iPhone’s super fast 4G LTE networking feature. This feature will be all but useless on networks other than Verizon, as they’re the only ones with a large enough 4G LTE network already in place to serve potential customers.
Despite getting clobbered in August, VZ has managed to bounce back and is currently less than 10% off from its 52 week high of $46.41.
Last month, the FCC approved a complicated deal in which Verizon and Vodafone (NASDAQ: VOD) will purchase a large slice of cable company SpectrumCo’s unused spectrum. One condition of the deal involves Verizon Wireless marketing the cable companies’ services through their retail stores. In return, Verizon also needs to sell a portion of their own unused spectrum to rival provider T-Mobile.
So why would Verizon approve a deal that requires them to market the products of their competitors? There are two reasons: As more people sign up for their 4G network, they will need the additional spectrum to handle the extra traffic without getting gummed up. Also, by purchasing spectrum from cable companies like Comcast (NASDAQ: CMCSA) and Time Warner (NYSE: TWC) they protect themselves against those companies becoming future competitors in the wireless internet sector.
Verizon offers an alternative to cable via its expensive fiber optic network called FiOS. A part of the FCC deal states that they do not need to market their competitors’ services for video and internet in locations where FiOS is available. This works out well for Verizon, because it means they can continue to offer packages that fit everybody’s needs without expanding a very expensive fiber optic network that is attracting less customers year on year.
In 2011, sales of wireless services provided by Verizon amounted to 63% of their revenues, and this should continue to grow as the number of smartphone and tablet users continues to rise. This deal allows Verizon to focus on the wireless services that are fueling their profits while allowing the less profitable fiber optic network to coast for a while.
The new iPhone 5 from Apple is expected to feature incredibly fast 4G LTE capability. AT&T’s (NYSE: T) 4G LTE network covers about 80 million potential subscribers, while Verizon’s currently covers 230 million and at its current rate of growth should have the entire country covered by the end of the year. If the iPhone 5 is unveiled this month and goes on sale in October there will be millions of AT&T customers that can’t use it to its fullest unless they jump ship and sign with Verizon. Right now is a good time to open a long position on this steady growth stock that is about to gain a lot of new iPhone subscribers.
If you’re thinking of adding Verizon to your portfolio for the long term because you want a telecom that pays high dividends with steady growth, with Verizon you’re making a good choice in the short term as well. Let’s compare Verizon’s recent revenue growth with their strongest rival in the telecom industry, AT&T. Currently Verizon’s revenues are growing faster than AT&T’s. In the first half of 2012 Verizon’s were 4.16% higher than the same period a year previous. AT&T posted gains of only 1.04% in their top line. Going forward, analyst estimates see very little growth ahead for AT&T compared to Verizon.
Verizon, pulling ahead of AT&T over the last two years, has far better growth prospects going forward.
Much of this gain can be attributed to smartphone users leaving AT&T for better service. Both T-Mobile and Sprint Nextel are offering unlimited data plans and are quickly gaining traction over AT&T wherever their networks are well developed enough to entice customers to switch carriers. Verizon on the other hand, may not offer unlimited data, but they do have superior customer service, and will be the only network with a viable 4G LTE network, at least until AT&T catches up, which at the current rate could take some time.
Verizon's year on year dividend growth and now a 4.57% yield is second only to AT&T’s 4.77%
Both AT&T and Verizon are dividend investor favorites as they currently offer yields of 4.77 and 4.57 percent, respectively. Over the past few years, as their stock prices have risen the two companies have had to offer lower dividend yields, although Verizon's have decreased slightly less than AT&T’s. At the moment they are neck and neck, and there are strong odds that Verizon will overtake AT&T again before the end of 2012 or early next year as they’re poised to generate higher revenues from signing on more highly profitable wireless subscribers.
Right now is a great time to start a long position on this long term steady growth stock with great short term prospects.
muhammadbazil 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. If you have questions about this post or the Fool’s blog network, click here for information.