High Dividend Stock Verizon VZ DividendVerizon is the largest wireless service provider in the United States. The company’s 4G LTE network is available to more than 98% of the country’s population.

 

Wireless operations, which include voice and data services and equipment sales, generate approximately 73% of Verizon’s revenue and account for over 86% of the company’s EBITDA (earnings before interest, depreciation, and amortization).

 

Wireline operations account for about 27% of the company’s revenue but only generate 14% of Verizon’s EBITDA. This segment includes traditional voice offerings, as well as broadband video and internet services. The company has sold off many of its wireline assets in recent years to reduce its exposure to slower-growing, capital intensive areas of the sector.

 

Overall, Verizon maintains more than 115 million wireless retail connections, 5.8 million Fios internet subscribers, and 4.6 million Fios video subscribers.

 

Business Analysis

Verizon’s business is (slowly) expanding into newer areas such as digital media, telematics, and the Internet of Things, but the company’s historical key to success has been delivering reliable wireless and wireline services over the best communications network in the country.

 

Verizon routinely invests more than $16 billion annually to increase the capacity and reliability of its wireless network. Thanks to its massive investments in capital equipment and spectrum licenses, Verizon’s 4G LTE network covers more than 314 million people today.

 

The company’s investments have also kept it at the top of Root Metrics’ rankings of wireless reliability, speed, and network performance for each of the last five years. The chart below shows overall performance metrics for the big four carriers:

Source: Root Metrics

Further helping its competitive positioning, Verizon maintains one of the 10 most valuable brands in the world. Consumers and businesses trust Verizon’s network reliability and reputation for superior performance, and the company’s thousands of brick-and-mortar stores keep its brand highly visible.

 

As long as Verizon continues to invest in its leading network coverage and architecture, the company should continue maintaining a massive base of customers. Disrupting Verizon’s base of customers would be almost impossible barring a revolutionary change in network technologies.

 

For one thing, growth in the number of new wireless subscribers has slowed considerably with smartphone adoption now being widespread. With new customer growth hard to come by, the industry has consolidated to become more productive and expand coverage. Verizon, AT&T, T-Mobile, and Sprint generate almost all of the industry’s revenue today, for example.

 

Verizon’s large subscriber base (over 115 million retail connections) provides it with the cash flow needed to support and enhance its existing wireless network. Potential new entrants lack the subscriber base needed to fund a nationwide wireless network and acquire spectrum licenses, effectively keeping them locked out of the market.

 

Trying to win subscribers over from Verizon would be extremely costly and impractical for a newcomer. It’s a lot easier to maintain an existing large base of subscribers in a mature market than it is to build a new base from scratch.

 

While competition between the four major carriers is intense, Verizon’s scale and leading market position have enabled its wireless segment to deliver excellent EBITDA margins in excess of 40% while generating predictable earnings.

 

Simply put, new entrants lack the capital, spectrum, and subscriber base to effectively compete with any of the big four carriers in the U.S. In addition to the industry’s high barriers to entry, the wireless communications market is also appealing because its services are non-discretionary in nature.

 

For example, Verizon’s churn rate (i.e. the percentage of customers who leave) in its wireless business is only about 1%. The majority of the company’s revenue is also recurring because consumers and businesses have a continuous need to communicate and use data, even during recessions.

 

As mobile and broadband usage continues growing with increased consumption of data and video, Verizon’s wireless network will become increasingly valuable – or at least that is what the company is banking on as it gradually exits wireline businesses and doubled down on wireless in 2014.

 

Verizon sold off around a quarter of its wireline phone and internet operations for $10.5 billion in 2015, reducing its exposure to these slower-growing businesses that could face increased regulatory scrutiny.

 

This move is part of Verizon’s ongoing shift to concentrate its efforts on its wireless and technology businesses, which are more profitable, relatively less capital intensive, and possess better growth prospects.

 

Verizon doubled down on wireless with its $130 billion acquisition of Vodafone’s 45% interest in Verizon Wireless in February 2014. With full control over Verizon Wireless, the company continues to aggressively invest in its industry-leading network as it prepares for the continued surge in data consumption.

 

Verizon has historically enjoyed a two-year advantage on its competitors when moving to the next generation network architecture. With almost all of its wireless data traffic now riding on the 4G LTE network, Verizon has already begun work to get its network ready for 5G (fifth-generation) wireless technology, which is expected to deliver 30 to 50 times faster connection speeds than 4G.

 

The company began conducting 5G trials during 2016, but the first mobile phones with 5G capabilities are unlikely to debut until 2019. Instead, the $65 billion U.S. residential broadband market, currently dominated by cable operators Comcast and Charter Communications, is Verizon’s first target of opportunity in 2018.

 

Management believes 25% to 30% of this industry is addressable by 5G technology, potentially disrupting the oligopolistic home internet market while providing a meaningful growth avenue for the firm. Rather than rely on costly last-mile wires and pipes to deliver internet to consumers, Verizon’s technology essentially sends signals through its wireless network into a home, where those signals are then converted into Wi-Fi.

 

Verizon expects to commercialize its high-speed 5G internet offering in the second half of 2018, with a broader rollout targeted in 2019.

Source: Verizon Investor Presentation

While 5G’s impact on mobile devices is a little further down the road, its significantly faster speeds and responsiveness could be game-changers for many parts of the technology industry, including self-driving cars, robotics, virtual reality, and smart cities. Accelerated growth in these areas, fueled by much faster connectivity, could cause data usage to explode even higher, further increasing the value of reliable wireless networks.

 

Of course, other mobile carriers are working on their own 5G networks as well. However, Verizon seems to have a clear lead. Sprint and T-Mobile are targeting a nationwide 5G network launch in late 2019 or 2020, according to The Wall Street Journal.

 

It will likely take years before the impact of 5G technology is fully known, so Verizon has been busy exploring growth opportunities outside of wireless and 5G technology, including new business models focused on video, the Internet of Things, and content. Rather than rely completely on its wireless operations, Verizon is positioning itself to benefit from the rise in mobile advertising and connected applications.

 

Most notably, the company spent more than $8.5 billion on two somewhat controversial acquisitions – AOL (acquired in 2015) and Yahoo (2017). These sites are two of the 10 most-popular web properties in the U.S., according to Bloomberg.

 

Through these deals, Verizon gained a mobile advertising platform and a host of online content, including The Huffington Post and TechCrunch. Verizon presumably has plenty of data surrounding its customers’ mobile behaviors, which could give it a chance of challenging Google and Facebook in the mobile advertising market.

 

The company also launched go90, a free mobile TV platform that delivers content for millennials. Go90 has been described as Hulu meets Twitter, and Verizon has reached content deals with the NFL, NBA, Vice Media, and major advertisers who want to reach this demographic.

 

In 2017, Verizon combined its media assets into a new segment, Oath, which accounts for around 6% of company-wide revenue. While it’s impact on overall results is relatively small today, the firm hopes to grow Oath’s revenue to between $10 billion and $20 billion in 2020, which would represent around 8% to 15% of Verizon’s total revenue today.

 

The ultimate success of Verizon’s media platforms is far from certain, but these initiatives could help lower wireless churn, further strengthen the Verizon brand, and generate meaningful advertising revenue if they continue to scale.

 

Internet of Things is another unique growth opportunity Verizon is focusing on. Telematics, smart energy, lighting, agricultural technology, and more are driving demand in this area.

 

Despite the excitement around these initiatives, they aren’t likely to be moving the needle for Verizon anytime soon. For example, Internet of Things revenue accounted for 0.7% of Verizon’s total sales during the fourth quarter of 2017. However, this area is consistently recording double-digit growth.

 

Significant revenue streams from these relatively new businesses is likely at least a few years out, and that’s if everything goes according to plan. Regardless, Verizon’s investments in these areas underscore the evolution that is occurring in the telecom industry.

 

Besides making selective investments in areas that offer potential for faster growth, Verizon is pulling levers to save money as it contends with an intensively competitive and saturated wireless market.

 

Specifically, the company announced plans in late 2017 to cut $10 billion in costs by 2022. These actions will free up more cash for the firm to continue investing in its wireless network and new growth opportunities while continuing to fund its dividend.
Management also expects the new tax bill to result in a $3.5 billion to $4 billion boost to cash flow from operations in 2018. The extra cash flow will primarily be used to reduce the company’s leverage, further strengthening its dividend safety.
Overall, Verizon seems likely to remain a key player serving the communications needs of millions of consumer and businesses for many years to come.

 

Key Risks

Arguably the biggest uncertainty facing Verizon is future growth in wireless. Subscriber growth has largely plateaued as U.S. smartphone penetration has more than tripled since 2010 to exceed 80% today.

 

The industry’s saturation has caused the big four carriers to fight each other more aggressively for existing subscribers rather than behave like a rational oligopoly. T-Mobile and Sprint have worked hard to improve their networks’ coverage and quality in recent years, too.

 

While they still score below Verizon’s network almost across the board in quality and coverage measures, the gap has narrowed, making it less painful for consumers to switch services. With 72% of U.S. counties having coverage from at least four wireless providers, according to data from Mosaik cited by The Wall Street Journal, consumers have more options than ever before.

 

Perhaps more importantly, T-Mobile’s growth strategy has been very aggressive in recent years. The company has shaken up the industry by bringing back unlimited data plans and dropping two-year contracts. As a result, Verizon has lost some of its ability to charge a premium for its network quality and even reported its first-ever quarterly net loss of wireless subscribers in early 2017.

 

Verizon has since stabilized and continued growing its subscriber base by bringing back its own unlimited data plans, but the industry’s era of lower phone bills appears to be the new normal. That’s especially true since talks of a merger between Sprint and T-Mobile have ended (more consolidation could have helped the industry become more rational).

 

The wireless market’s saturation is likely a strong driver behind Verizon’s pursuit of new growth businesses in the technology sector. However, as previously mentioned, these areas remain relatively small compared to the company’s wireless operations, and they are far from guaranteed successes, especially given Verizon’s lack of expertise with these business models.

 

For now, Verizon will live and die by its wireless business. If growth in the wireless market weakens, the battle between incumbents for existing subscribers could intensify and further pressure the industry’s margins.

 

There are also risks with Verizon’s 5G investments, which are still very much in the early days and far from being proven. As other competitors invest heavily in 5G and non-traditional rivals, such as Google and Facebook, explore creating their own mobile wireless networks and internet services, the telecom sector seems likely to continue evolving faster than it ever has before.

 

Closing Thoughts on Verizon

If one thing is clear, the telecom industry is undergoing a meaningful evolution. Content, media, and communications are converging like never before, and Verizon is one of many players working to reinforce its position in the market.

 

For now, Verizon appears to remain a reliable income stock, one that seems likely to continue its streak of paying uninterrupted dividends for more than 30 consecutive years. The company’s scale, hard-to-replicate network assets, mission-critical services, brand recognition, and massive subscriber base remain important competitive advantages.

 

As management works to cut costs, reduce debt, and continue investing in 5G and new businesses, such as media and advertising, Verizon should become even better positioned to deal with intensified competition in wireless markets.

 

Overall, Verizon seems likely to continue generating predictable results in the years ahead. However, investors need to keep a close eye on future developments in the wireless market, especially given the company’s capital intensity and large debt load, which reduce its flexibility if conditions were to meaningfully weaken or if management desired to make a major acquisition for growth.

 

To learn more about Verizon’s dividend safety and growth profile, please click here.

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