Verizon has considerable appeal for value-oriented investors

Sound fundamentals and a healthy dividend yield make this U.S. wireless leader attractive.

Michael Pe 10 July, 2015 | 5:00PM

Verizon Communications Inc. (VZ) is well positioned to capitalize on the rapidly growing U.S. consumer demand for mobile connectivity. Having earned industry-leading customer loyalty, Verizon continues to invest in its vast wireless networks to provide the speed and quality that smartphone users demand. This has translated into a formidable wireless business.

One of Verizon's smart decisions was not expanding into Canada. In 2013 there was rampant speculation that Verizon would, with the Harper government's blessing, enter the Canadian wireless market by acquiring Wind Mobile. In a pre-emptive move, the major Canadian carriers implemented data-sharing plans to help smaller competitors, which gave Canadian consumers more choice.

In the end, instead of taking on established Canadian providers  Rogers (RCI.B),  Bell (BCE) and  Telus (T), Verizon decided to increase its existing stake in the U.S. wireless industry. It did so by acquiring the remaining 45% stake that it did not already own in Verizon Wireless from British cellphone carrier Vodafone. The deal was completed in 2014 in a transaction valued at approximately US$130 billion.

This investment has paid off. Verizon's wireless business is the largest and most profitable in the U.S. and continues to grow as the company focuses on delivering its 4G LTE network to more of its customers. Verizon is taking advantage of growing demand for faster mobile Internet connectivity. In 2014, smartphones accounted for 79% of its retail clientele, up from 70% a year earlier.

Verizon has also consistently invested in its networks by building infrastructure and acquiring spectrum, a limited resource of radio frequencies which all wireless communications require. With this investment, Verizon ensures it will be ready for increased video and data traffic over its networks. The company has the largest geographical LTE network in the U.S., available to more than 98% of the population.

Further investments may prove more challenging, considering the amount of debt the company has taken on from purchasing Verizon Wireless. Morningstar analyst Michael Hodel points out in his  report on Verizon that if smaller competitors such a  T-Mobile (TMUS) and  Sprint (S) are unable to stabilize market share and increase revenue, they may turn to deep price cuts. This could cut into Verizon's consumer market share and its cash flow, hindering its ability to repay its debt.

Even with potential headwinds, Hodel believes that smaller firms do not have the resources to compete aggressively over the long term. Further, Verizon's customers are less likely to switch to other providers, thanks to the company's reputation for high-quality networks and its unmatched scale.

Results from a 2014 Consumer Intelligence Research Partners survey showed that out of the major mobile carriers in the U.S., Verizon had the highest retention rate at 89%. Another survey from RootMetrics showed that Verizon beat its competition in network reliability, speed, and data and call performance.

Verizon stock has considerable appeal for value-oriented investors. It's trailing price-to-earnings ratio of 13.3 times and price-to-reported cash flow ratio of 5.4 times are both among the best values to be found in U.S. equities.

Conservative investors seeking income will also be attracted to Verizon, as its expected dividend yield for this year is 4.7% and its five-year price beta is 0.33, meaning Verizon stock should hold up reasonably well if the U.S. market falters. Verizon has increased its dividend for 10 consecutive years, while averaging a 5% annual dividend yield for the last 10 years.

Meanwhile, in the past three months, 17 of the 22 analysts who cover Verizon stock have revised their forecast upward for 2015 operating earnings, which is a bullish indicator. If you have room in your portfolio for exposure to the growing wireless industry, Verizon's stock is worth a look.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
BCE Inc64.11 CAD-0.16
Rogers Communications Inc Class B65.28 CAD0.18
Sprint Corp Registered Shs Series -1-6.42 USD-0.31
TELUS Corp47.61 CAD0.08
T-Mobile US Inc81.60 USD0.68
Verizon Communications Inc61.05 USD1.06

About Author

Michael Pe

Michael Pe  Michael Pe is a project manager for the CPMS division of Morningstar. He holds a bachelor of computer science degree from the University of Western Ontario and holds the CFA designation. He can be reached at michael.pe@morningstar.com but cannot provide individual advice.