Verizon: Streaming Potential?

11/12/2014 10:00 am EST


Jimmy Mengel

Editor, Outsider Club

Like many consumers, Jimmy Mengel, editor of Outsider Club, is frustrated with the standard cable TV model. But he sees long-term opportunity in À la carte programming and content streaming. Here, he highlights one favorite player in the sector.

Steven Halpern: Joining us today is Jimmy Mengel, editor of Outsider Club.  How are you doing today, Jimmy?

Jimmy Mengel:  I’m pretty good, Steven.  How about yourself?

Steven Halpern: Very good.  Thanks so much for taking the time.  In your latest research, you mentioned that you hate the overall product being offered by cable companies, yet, within the sector, you see potential in the trend towards à la carte television.  Could you explain to our listeners what that’s all about?

Jimmy Mengel: Yeah, it’s pretty simple from my perspective. I do hate cable. I’ve always hated cable.  It just seemed like such a chore to even find something that you wanted to watch, so I’ve spent agonizing amounts of time just flipping through channels and then just settling on something mediocre just to avoid having to repeat the process again.

So, for at least a decade or two, I’ve just been asking myself, I was like, “When can I just choose to pay for the things I want to watch?”  I don’t know too many companies that can offer their users a product that they only use, say, 10% of; so, with, kind of, the Netflix model of paid content, where you pay to watch things conveniently.

I don’t know if you use Netflix yourself, but I remember the first time I fired up, kind of, the Netflix streaming service and I was just blown away.  I was like, “Oh, my God, I don’t have to sit through all these commercials.  I don’t have to flip channels around.  I can actually pick something I want to watch and then be done with it.” 

I think, with the success of Netflix, it really opened the floodgates for companies like HBO and CBS, who have also announced plans to provide paid streaming services and I think that’s going to be the trend going forward.  It’s already pretty much happening.  

I’ve got a couple of figures here: Almost 7.5 million households are now considered cord cutters, which means they have just completely gotten rid of cable and that’s almost 7% of homes here in the States, which compares to maybe 4% a couple years ago; so, that’s a trend that’s going to keep going.

The younger generations, especially, are much more adept at streaming services when it’s convenient, when they can do it, and they’re not sitting around flipping channels anymore.  

Steven Halpern:  You note there are a number of content providers such as Netflix, but, from an investment standpoint, your preference is a pretty conservative blue-chip, dividend-paying company called Verizon (VZ).  What’s the attraction there and how does it fit into this whole sector that you’re looking at?

Jimmy Mengel:  Well, a lot of that’s kind of my personal investment philosophy. I would rather pick something, hold it, get a juicy dividend out of it, then try to play the one-off content providers; so, like I said in my piece, I kind of like to think of the whole thing in terms of a stream.  

All of these content providers, say Netflix, Hulu, now HBO, CBS, they’re kind of like ships riding this vast stream into our living rooms, and cell phones, and tablets; so, I could take a bet on one of the ships, say Netflix or HBO, but if you watch Netflix it’s been really volatile.  

You could have made a lot of money, sure, if you got in early, but it kind of whip-saws around a bit and I think that kind of speaks to the fickle nature of consumers; so, whether—like if HBO’s going to—if you’re going to invest in HBO, they’ve been on a heck of a run in terms of their content, but I think it’s just the fickle nature of people.  

If they kind of strike cold and don’t keep releasing these amazing shows, then they just kind of move their content provider around; so, I would rather be—I’d rather bet on the stream itself—which is why I like Verizon, for example.


Steven Halpern: You also note that, while a lot of people in this industry are fighting this trend, that Verizon is actually looking to embrace it.  Could you explain that?

Jimmy Mengel: Yeah, so, it seems like they have everything positioned correctly. They do offer a, kind of, a one-stop shop.  You have your wireless Internet provider, which you obviously need to do any of this stuff, and they have their cell phone business, which is their primary business, and it’s a wonderful business; so, basically, why I like Verizon is they are looking forward.  

I think the CEO, Lowell McAdam, was speaking at a Goldman Sachs conference recently and he flat-out admitted it.  He said nobody wants to have 300 channels on your wireless device, or your cell phone, or your tablet.  It just doesn’t make sense; so, he has predicted that everything’s going to go à la carte, which is kind of the way it’s playing out now.  

The cool thing they’re going to do is, being a one-stop shop, they have all of the infrastructure, so they’re going to launch an Internet-based TV service themselves early next year, which is kind of like similar to Netflix, or Hulu, or any of the other providers, but it seems it’s going to be much more broad in terms of the content.  

What I think is really cool is they’re talking about live streaming big events like sporting events; so, right now, a lot of people get cable specifically so they can watch, say, Monday Night Football on ESPN or some of these larger sporting events.

So, I think if they get out in front of this and, kind of, give you this robust package of wireless content, they pretty much have the brand to keep their customers all in one place, keep them happy, and then provide them with these services.

Steven Halpern: Is it to safe to say that, with the stocks dividend, you see Verizon as both a long-term growth play as well as an idea that income investors could consider?

Jimmy Mengel: Yeah, absolutely.  It’s a great dividend stock, pretty much any way you slice it.  I think right now it has a yield something like 4.5%.  You compare that to, say, Comcast, which is, I think, 1.5%/1.6% dividend, and it’s kind of a no-brainer.  

I know that Warren Buffett himself owns—I don’t have the numbers in front of me—but a ton of Verizon and he’s kind of one of those guys that’s just like, buy and hold, collect the checks, and it doesn’t look like they’re going anywhere.  

I think they’ve grown their dividend every year over the last eight years and it looks like it’s going to continue to grow at around 4% or 5% per year, so I see that continuing into the future and then, I don’t know, I just I think it stands apart from someone like Comcast, mainly because of their branding too.  

Whereas, say, Comcast is one of the most hated companies in America, Verizon consistently ranks at the top of brand identity and customer satisfaction; so, they don’t have to fight to keep their people.  

Even cell phone pricing plans were kind of a race to the bottom, they pretty much held pat and they stuck with their brand loyalty and I think they’re pretty much leading the pack in that regard.

Steven Halpern: Well, we really appreciate you taking the time.  Thank you so much for joining us, today.

Jimmy Mengel:  Yeah, absolutely, Steven.  Thanks for having me.  

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