Competition in the wireless space is, no doubt, heating up. And telcos involved in that sector are surely feeling it. In the following discussion, we explore what makes Dow component Verizon (VZ - Free Verizon Stock Report) worthy of consideration by investors.
Originally called Bell Atlantic, the global broadband and telecommunications company was one of the seven “baby bells” born out of the breakup of AT&T (T - Free AT&T Stock Report) in 1984. The telecom initially operated in several states along the East Coast/Northeast of the U.S., until it joined with NYNEX in 1996. Four years later, it merged with GTE and became Verizon Communications. Just prior to its marriage to GTE, the company teamed up with Vodafone Group Plc (VOD) of the U.K. to form a wireless joint venture, 55% of which is owned by Verizon and the remainder owned by Vodafone. Verizon spent the next few years divesting noncore assets and buying wireless players, in an effort to beef up its mobile segment. The move is consistent with the general industry shift away from traditional wireline services to wireless. A synopsis of the company’s background and other useful information can be found in the Business Blurb, located in the midsection of the Value Line page. (For more on Verizon’s history, check out our Dow 30 Profile.)
Fast forward to the present. Verizon, whose wireline services (i.e., voice services, high-speed Internet, FiOS Internet, video services) constitute less than 40% of revenues and domestic wireless make up more than 60% of the top line, is currently the leading wireless carrier in the U.S., in terms of retail customers and revenue. While the company has seen growth in its FiOS services, its success is largely attributable to its wireless business, thanks to its reliable 4G LTE network, which allows users to download virtually anything on their Web-enabled devices at fast speeds. But Verizon may not hold the venerable market status forever.
Spectrum, apparently, is the name of the game in the wireless space, and hence, the source of competition among service providers. Broadly defined, spectrum is what makes multiple signals be transmitted on different frequencies over a geographic distance, with sections of it called bands. With increased use of media-intense Web-enabled devices (i.e., smartphones, tablets), the demand for higher data-carrying capacity and faster transmission (spectrum) is growing. That, in turn, is fueling demand for devices with more superior data functionality.
There is one concern, though. Sprint Nextel (S) intends to purchase the remaining 50% stake it doesn’t already own in Clearwire (CLWR), and stands to gain 130 MHz of spectrum. To complicate matters, satellite television provider DISH Network (DISH), which is looking to expand into the mobile broadband market, recently made a $2.3 billion bid for Clearwire, in an attempt to outdo Sprint’s $2.2 billion offer, thereby triggering a battle for the spectrum-rich wireless service provider. If Sprint succeeds in buying Clearwire, its total spectrum would jump to about 200 MHz, twice that of Verizon and more than double that of its other rival AT&T.
The spectrum is in the less desirable 2,500 MHz band that doesn’t penetrate walls and structures very well, versus Verizon’s better-quality 700 MHz range. But manufacturers may eventually begin to make mobile devices that are compatible with and can support the higher frequency. In the meantime, Sprint is being acquired by Japanese telecom heavyweight SoftBank. With the financial help of its new parent, Sprint should complete its 4G LTE upgrade. The expanded and enhanced coverage could potentially catapult Sprint from the number 3 spot to the top, ahead of both Verizon and AT&T.
That said, this is more of a long-term endeavor, not to mention there are uncertainties with Sprint’s plans, as noted above. Nothing is set in stone. For the time being, Verizon will likely remain the wireless leader and continue to pursue quality spectrum. Based on its investment merits, VZ stock deserves a look. True, we can infer from the Price Chart and the estimated 3- to 5-year Target Price Range, as well as from the Projections box on the upper left-hand side of the page, that the issue has somewhat limited appreciation potential over the long haul, when compared to the Value Line median. However, this Dow component is ranked 2 (Above Average) for Timeliness, as shown in the Ranks box (located in the upper left-hand corner). The rank suggests it makes a good year-ahead choice, reflecting its strong price and earnings momentum. As a reminder, Timeliness ranks range from 1 (Highest) to 5 (Lowest).
What’s more, VZ boasts a solid dividend yield (as shown Top Label at the top of the page), so investors stand to get a decent return from cash distributions at the price shown over the coming 12 months. The Quarterly Dividend box (lower left-hand corner) shows the payments doled out to stockholders. As is apparent from the Statistical Array (in the center of the page), the company’s healthy “cash flow” per share comfortably supports the dividend.
Investors may also be drawn to Verizon’s excellent risk profile. For one thing, the issue features a top-notch Safety rank of 1. Similar to Timeliness, Safety, which is also found in the Ranks box, is based on a scale of 1 (Highest) to 5 (Lowest). In addition, VZ gets a perfect score for Price Stability, evident from the Ratings section at the bottom right, and its Beta coefficient of 70 (located at in the Ranks box) further implies lower-than-normal volatility, versus the market. Too, thanks to its sound finances, the telecom giant gets a top mark of A++ for Financial Strength in the Ratings box. The Capital Structure and Current Position (both found on the left) support this, while the long-term debt ratio in the Array indicates the company has a manageable level of debt.
Analyst Kenneth A. Nugent clearly makes his case for Verizon in the last paragraph of the Commentary, where he outlines the blue chip stock’s best attributes, many of which we’ve touched upon above. Summing it all up, this Dow component would make a fine addition not only to momentum accounts, but also to income-driven portfolios with a more conservative bent.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.