Investors Are Seeing Red and That's a Good Thing
If you believe that wireless is the wave of the future, then you need to be invested in Verizon . Almost without fail, if you compare Verizon's wireless results to their competition, the company some call Big Red is generating green like no one else. In case you doubt the company's dominance, there are at least four measures that suggest otherwise.
Can you hear me now?
Some investors might question the idea of investing in Verizon based on their Verizon Wireless business. Given that the company owns 55% of Verizon Wireless, and Vodafone owns the other 45%, until a few weeks ago I would have agreed. However, Verizon is putting its money where its mouth is, by ponying up a reported $130 billion to buy out Vodafone's share of the business. Considering that at the end of last year, Verizon Wireless paid an $8.5 billion dividend to its parent companies, this 45% stake from Vodafone means the company received over $3.8 billion from this dividend.
While $130 billion seems like a large number to pay for Verizon to get control of its Wireless division, the company's ability to retain billions of dollars in cash flow seems to argue this deal makes sense. When you look at Verizon Wireless' margins, you can see why Verizon wants complete control of this thriving business.
Apparently some investors aren't really listening to what Verizon is saying in its earnings reports. You would think that a company with margins that crush the competition would get more respect. In the most recent quarter, Verizon reported a wireless operating margin of 32.4%, which was significantly stronger than AT&T's wireless margin of 27.1% or Sprint's less than 1% margin.
What is particularly ironic about Verizon's high wireless margins is the fact that there have been multiple articles over the last year worrying about how smartphone upgrades are killing wireless carrier's margins . Verizon reported over 80% of new postpaid activations, and now 64% of the company's subscribers are using smartphones. If smartphones are hurting the company, why was Verizon able to grow wireless margins on a year-over-year basis?
When you consider that AT&T reported 88% of new postpaid subscribers chose smartphones, and Sprint reported 89%, you can see the trend is toward an increase in smartphone usage. With Verizon leading the way in subscriber additions as well, if smartphones are the bane of wireless carriers, the data doesn't seem to bear out this conclusion.
If you build it they will come
While AT&T and Sprint both advertise that they are expanding their network, Verizon consistently advertises just how much more advanced their network is. If you want a visual of the coverage difference, look at the below three maps.
Source: CNN Money
As you can see, Verizon has a significant advantage when it comes to 4G LTE coverage area. In case investors question the importance of coverage, consider that Verizon consistently reports the best wireless additions and the lowest churn rate of its peers. In the last three months, Verizon added 941,000 new postpaid subscribers, AT&T added 551,000 subscribers, and Sprint subscribers were actually down 4.96% on a year-over-year basis.
While postpaid additions are important, it's almost more important that the company retain its subscribers. It makes perfect sense that Verizon's superior network might be a key reason the company retains its wireless customers at a better rate than its competition as well. Verizon's most recent postpaid churn percentage was 0.93% compared to AT&T's churn rate of 1.02% and Sprint at 1.83%.
Did I mention its customers spend more money too?
What do you get when you combine a superior network, better subscriber additions, and low churn? Apparently what you get when you combine these factors is subscribers who are willing to spend more money on their service. Verizon Wireless' average revenue per customer rose by 6.4% in the recent quarter, while AT&T saw a 1.8% increase, and Sprint only fared slightly better with a 2.56% improvement.
While it's true that Verizon is more than just Verizon Wireless, this unit is the growth driver for the company and its superior performance is a strong argument for buying the shares. Verizon's share price doesn't scream value at about 16.7 times projected EPS, but the company's 4.4% yield should help investors wait patiently for returns.
Although AT&T does pay a higher yield of 5.3%, Sprint isn't even in the ballgame with no payout. To make matters worse for these companies, Sprint is expected to grow earnings by just 5% in the next few years, while analysts expect 6.5% growth from AT&T. It seems like analysts are listening better than some investors, as they expect almost 10.5% EPS growth from Verizon in the next few years. Combine superior performance in their wireless business, the strongest growth in their peer group, and a respectable yield, and investors who want to make some green for their portfolios should set their sights on Big Red.
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The article Investors Are Seeing Red and That's a Good Thing originally appeared on Fool.com.Chad Henage owns shares of Verizon Communications. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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