Five Reasons You Should Invest in Verizon
As smartphone usage continues to pick up, telecoms are poised to experience rapid growth. Verizon Communications Inc. (VZ), our pick of the lot, seems to be a good investment. Here is why we are bullish on the company
The largest US wireless telecommunications company, Verizon Communications Inc. (VZ), has maintained a dominant position in the industry with the superior 4G LTE services it provides for high-speed internet access through mobile devices, its low churn rate*, and steady growth in wireless network subscribers. Here are five reasons why we feel Verizon should be in your investment portfolio.
*The rate at which subscribers drop out of a company’s user base.
1. Growth in Usage of Mobile Devices
The increasing usage of mobile devices, which include smartphones, tablets and various interconnected devices, is leading the growth in data consumption. 61% of all US postpaid subscribers now own a smartphone, and device makers expect the number to continue rising with time. Verizon has been able to capitalize on growth in the smartphone user base with its 4G LTE services, which enables high-speed wireless data transfers for higher-end smartphones and tablets.
2. Strong Growth in Subscribers
The number of retail wireless services subscribers has jumped from roughly five million in 2000 to roughly 338 million as of now, even as the number of subscriptions for fixed line connections has dropped from 212 million to 166 million over the same period.
Verizon’s FiOS product provides broadband internet and TV services to end users. The service has recorded growth in subscriptions, even though voice revenues for the company have declined. The FiOS user base has increased at a compound rate of 19.8% through the five-year period ending 2012.
Voice to Data
The demand for data services – which include messaging, video streaming, and uploading and downloading of content – is on the rise. While voice services still generate more revenues compared to data services, industry surveys conducted by Ericsson (ERIC) suggest that a rise in the usage of smartphones, tablets, and other mobile devices will result in data revenues eventually overtaking voice revenues by around 2016.
Wireline to Wireless
Wireless revenues for all major carriers have risen over the years. T-Mobile’s revenues have increased the most, with year-over-year growth of 5.24% recorded in 2012. In comparison, revenues of AT&T (T), Sprint Corporation (S) and Verizon (VZ) rose 0.56%, 5.04%, and 4.48% respectively over the same period.
This trend is reflective of the growth in usage of wireless services over wireline services, as more users shift towards mobile telephony.
3. Decent Stock Performance
Verizon’s stock price is up 70% over the last five years, even though the broader market, as represented by the S&P 500 index, is up 120% over the same period (ended February 13, 2014). The telecom industry ETF (IYZ) has returned 85% over the same period, while Verizon’s closest competitor, AT&T, is up 40%.
One of the major reasons why Verizon has outperformed AT&T is its partnerships with major companies like Comcast Corporation (CMCSA). Though the partnership ended October 2013, both corporations benefitted from the mock-merger in terms of an increased customer base. Furthermore, Verizon began offering its 4G LTE service in more than 400 markets in 2012, while AT&T was offering it in fewer than 40 the same year.
Verizon’s current stock price is a multiple of about 16 times the company’s earnings over the past 12 months, a premium to the 11.8x price-to-earnings multiple of the wireless telecom industry.
4. Lowest Churn Rate
As mentioned earlier, the churn rate refers to the rate at which consumers either discontinue their carrier services or switch to a competitor’s service. Verizon has outperformed its rival AT&T by maintaining the lowest churn rate in the industry. The churn rates in the fourth quarter of FY13 were:
- Verizon Wireless: 0.96%
- AT&T: 1.11%
- T-Mobile: 1.7%
- Sprint: 2.15%
5. High Dividend Yield
In the last twelve months (LTM), the company generated about $25.12 billion in free cash flows (FCFs) – enough to easily cover dividend payments. Verizon’s dividend yield peaked at 6% in 2009, but has since fallen to 4.2% in FY13. The stock’s dividend yield has fallen despite a rise in per share dividends, owing to the fact that Verizon’s share price rose from $44.4 in March 2013 to $49.14 in December 2013.
The company has consistently increased dividends since 2009. The increase in dividends over the years has been enabled by the company’s improved FCFs, which increased from $13.53 billion in 2011 to $22.21 billion in 2013.