Verizon Communications Inc. (NYSE:VZ) posted better-than-expected earnings even after taking a hit for costs related to a strike, though revenue fell by more than Wall Street forecasts. The result for shareholders? Something of a letdown, with VZ stock off more than 1% in Tuesday’s premarket trade.
For the most recent quarter, Verizon earnings came to $702 million, or 17 cents a share, down from $4.23 billion, or $1.04 cents, a year ago. After stripping out the effects associated with labor contracts and some other items, earnings would have been 94 cents. Analysts on average were looking for earnings of 92 cents a share, according to a survey by Thomson Reuters.
Revenue fell to $30.53 billion from $32.22 billion. That was short of the Street forecast for $30.95 billion. And in addition to charges from the labor action, VZ saw some weakness in the wireless division as customers opted for cheaper plans. services
The earnings report comes a day after VZ agreed to buy Yahoo! Inc.’s (NASDAQ:YHOO) web assets for $4.83 billion in cash. VZ was the favorite to win the auction for Yahoo’s web businesses — and some real estate — and shows how determined the telecommunications company is to make a go of the digital media and advertising business.
With 2015’s acquisition of internet has-been AOL, VZ will have a collection of desirable ad platforms and the content to move them. The double-barreled approach is key to the company’s ambitions in LTE wireless video, streaming video and mobile strategy. At the time of the deal last year, AOL’s CEO said it was a “40-40 opportunity, which is $40 billion going to mobile and $40 billion going to video.”
That should be music to any telecom investor’s ears.
This is a sector known for gushers of cash and big dividends, not growth. After all, the market for telco services is saturated. With AOL and now Yahoo, Verizon would appear to have a chance at becoming a major player in mobile and video for the Generation X and baby boomer cohorts.
VZ Remains a Dividend Darling
On the other hand, no one would be surprised if VZ had to write down a big chunk of Yahoo in a couple of years. No matter how attractive the ad technology might be, it’s not clear that another distribution platform will make Yahoo’s collection of old businesses resonate with users once again.
Regardless, in some ways it’s actually a low-risk bet. The main reason to own VZ stock is for the amazing cash flow and large, steady dividend. Indeed, the dividend is no doubt partly responsible for VZ stock’s incredible gain of 20% this year. True, the share-price appreciation has brought the yield down to 4%, but then the broader market yields just 2.1%. Even worse, the Nasdaq 100 has a yield of 1.3%.
And as for the purchase price of nearly $5 billion, VZ can easily afford it. For the 12 months ended March, Verizon generated about $20 billion in free cash flow.
That said, VZ has to find the key to turning the struggling ad business around. Yahoo has a long-term “growth” forecast of negative 6%. Telecom stocks, like utilities, aren’t growth names; VZ has long-term growth projections of just 3.6% per annum.
The Yahoo deal won’t close until early 2017, and it’s going to be very interesting to see if it becomes accretive to earnings or just another albatross.
Be that as it may, no one holding Verizon stock should develop insomnia over the potential for Yahoo to become a drag. The Yahoo purchase price represents only 2% of the telco’s market value.
The point is that this is a small deal. For all the ink it’s generated, the acquisition of Yahoo doesn’t really change the investment thesis on Verizon stock.
When interest rates are plumbing fresh lows on Brexit and other factors, Verizon’s big dividend is too alluring to ignore.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.