VERIZON COMMUNICATIONS INC. $47(New York symbol VZ, Conservative Growth and Income Portfolios, Utilities sector; Shares outstanding: 4.1 billion; Market cap: $192.7 billion; Priceto- sales ratio: 1.5; Dividend yield: 4.7%; TSINetwork Rating: Average; www.verizon.com) gets 70% of its revenue and 95% of earnings from its 108.6 million wireless subscribers. The other 30% of revenue and 5% of earnings comes from its wireline business, which serves 19.5 million traditional phone customers and 26.4 million high-speed Internet and digital TV users.
In 2014, the company bought the 45% of the Verizon Wireless joint venture it didn’t already own from U.K.-based Vodafone Group (Nasdaq symbol VOD). Verizon Wireless sells wireless services in the U.S.
Verizon paid $130 billion for Vodafone’s stake, including $58.9 billion in cash. It also issued $61.3 billion worth of common shares to Vodafone shareholders and borrowed most of the remaining $9.8 billion.
The Vodafone stake, along with strong wireless demand, boosted the company’s revenue by 19.3%, from $106.6 billion in 2010 to $127.1 billion in 2014. Earnings fell from $0.90 a share (or a total of $2.5 billion) in 2010 to $0.31 a share (or $875 million) in 2012, mainly due to a $7.2-billion charge related to a change in its pension plan accounting policies. Earnings jumped to $4.00 a share (or $11.5 billion) in 2013 but fell to $2.42 a share (or $9.6 billion) in 2014 as the Verizon Wireless purchase added more one-time charges and other operating costs.
Excluding all unusual items, earnings per share gained 18.0%, from $2.84 in 2013 to $3.35 in 2014.
AOL brings crucial expertise
In June 2015, Verizon completed its $4.4-billion purchase of AOL Inc. (New York symbol AOL), which owns several popular websites, including The Huffington Post, TechCrunch and Engadget. AOL has also developed technology that uses analytics software to place ads on websites, helping advertisers better connect with potential customers. Verizon will use AOL’s sites to offer more video, particularly on mobile devices.
The new operations are profitable, and should add $2.6 billion to Verizon’s annual revenue. Verizon can comfortably afford this purchase. As of March 31, 2015, it held cash of $4.4 billion, or $1.08 a share. Its long-term debt of $108.9 billion is a high, but manageable, 57% of its market cap.
Meantime, the company continues to free up cash by selling less important operations. For example, it recently agreed to sell its traditional phone business in California, Florida and Texas for $10.5 billion. It has also leased the rights to 11,300 transmission towers for $5 billion.
Including AOL, Verizon’s 2015 earnings should rise to $3.84 a share, and the stock trades at a low 12.2 times that forecast. The $2.20 dividend yields 4.7%.
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