Why US-listed Verizon appears in so many UK investors’ portfolios
With more than 155m subscribers New York-listed Verizon Communications is America’s second biggest mobile phone network and its rough $232bn market value ranks it 21st in the S&P 500.
It covers more of the US than any rival and its network is widely seen as the best quality available in its market. It has the widest 4G network, for example, covering an estimated 300m people.
Unfortunately 2019 has been a limp year for Verizon in stock market terms. At $55.26 the stock is modestly down on the $56.22 at which it ended 2018, although it is forecast to yield 4.3% from dividends. By contrast, the S&P 500 has risen 19.4% so far in 2019.
Little of this may seem to matter to most in the UK, yet a past quirk of circumstance means Verizon’s prospects and share price performance carry more clout with Brit investors than you may think.
That’s because of a deal struck between Verizon and FTSE 100 group Vodafone (VOD) in 2014 where the latter sold its 45% stake in mobile arm Verizon Wireless. The $130bn deal was complex but it effectively meant that Vodafone shareholders received 26 shares in Verizon Communications for every 1,000 Vodafone then owned, plus 300p a share in cash.
Today that equates to a stake worth 545 Vodafone shares due to a subsequent six-for-11 stock consolidation.
In short, it means many Vodafone shareholders today own Verizon stock.
Roughly speaking, if an investor owned 3,000 Vodafone shares before the Verizon deal and subsequently did nothing they would today own 1,635 shares in the UK company (after rounding) plus about 43 shares in the US company.
Importantly, the Verizon stake would today be worth almost as much as the Vodafone shares.
ARE THE VERIZON SHARES WORTH OWNING?
If you are one of those Verizon-owing investors, what should you do with them?
To answer that question we must first understand a bit about Verizon, its competitive position, financial prospects and where that leaves dividends.
Verizon was formed in 2000 by the $65bn merger of Bell Atlantic and GTE, one of the biggest in US corporate history. But like all telecoms businesses Verizon no longer fits into a neat mobile network operator pigeonhole. The global industry has morphed into a converged multi-communication service where customers are armed with superfast broadband, mobile calls and data and, increasingly, entertainment content through streaming TV, music, games and other apps.
We all know that landline usage has fallen off a cliff while mobile subscriptions have flat-lined on saturation. Who doesn’t have a mobile phone these days? Pressure on the industry has come from intense price wars among carriers that drive tariffs down while it has never been easier for users to switch networks.
This led Verizon to roll the dice on content to instil consumer loyalty, spending about $10bn on AOL and Yahoo. It was a mistake and one that even the company now admits, leaving it exposed to declining advertising revenues. It has since taken a goodwill write-off worth $4.6bn on those acquisitions.
The plus side of this situation is a renewed push on its core knitting, providing a high quality communication network with best-in-class service. Verizon’s reputation remains excellent and its churn rate (the percentage of customers who leave) is consistently the lowest in the industry.
HOW MUCH MONEY DOES IT MAKE?
Sadly its financial track record is patchy and growth is limp. Since 2013 net income has gone from $11.5bn to $15.5bn, yet has taken in $30.1bn peaks (2017) and $9.6bn troughs (2014) along the way. Revenue has expanded from $120.6bn to $130.9bn, implying average annual growth of just 1.7%.
For 2019 analysts predict net income of $19.7bn and revenue of $131.6bn, rising to $20.1bn and $133.1bn respectively in 2020.
Verizon’s big play for the future is making the most of next generation 5G mobile networks, where it has already gone live in Chicago and a handful of other US cities. It hopes to have more than 30 of such networks online by the end of this year.
But this is very early days and nobody really knows the pace of widespread adoption, or even if these multi-billion dollar investments will pay for themselves.
DIVIDENDS ARE ALL THAT MATTER
So when you cut to the chase, Verizon is just another growth-strapped income-paying utility where dividends are (almost) everything. As the chart shows, it has a 15-year unbroken dividend growth record.
Dividends to shareholders are paid quarterly and totalled $2.385 in 2018. So far this year it has announced first and second quarter returns worth $1.205, putting it bang on track to hit its full year $2.43 payout target.
Next year’s forecast is pitched at $2.48, rising to $2.53 in 2021. This implies a 2020 income yield of 4.4%. Importantly, future dividends should be comfortably covered by expected earnings and free cash flow.
SHARES SAYS: An implied 4.4% income yield does not appear hugely attractive from a supposedly low growth utility when UK investors can get just as good at home. There is no urgency to sell the shares but little point in buying more, especially for those that have exposure to UK or global income funds or investment trusts.