Verizon is the Telecom to Beat

02/12/2013 11:30 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Despite the recent headline loss, which has spooked some investors, Big Red's free cash flow and successful growth strategy is a formidable combination, according to Roger Conrad, editor of Utility Forecaster.

Capital is the key to dominating the US communications industry. And neck-and-neck with archrival AT&T Inc (T), Verizon Com­munications (VZ) continues to lap the field.

Verizon added a best-ever 2.1 million contract wireless subscribers in the fourth quarter of 2012, virtually all via smartphones or Internet-focused devices such as tablets.

Nearly two-thirds of the devices are on the company’s nationally-leading 4G long-term evolu­tion network. And the company’s customer satisfaction remains the industry standard, with turnover (or “churn”) only 0.95%.

Key to the effort was $16.2 billion in capital expenditures for 2012, roughly matching the total for last year. That’s a figure only AT&T exceeded. And Verizon handily beat spending by the next eight sector rivals combined. Yet, the company still generated $15.3 bil­lion in free cash flow, enough to cut debt by 5.7% and comfortably fund a 3% dividend increase. Free cash flow covered the payout by a 2.6:1 margin.

The company’s headline loss of $1.48 per share is bound to flummox some. So, apparently, have lower wireless margins from higher subsidies for new devices. The loss, however, was a one-time, non-cash write down of pension assets, which reduced taxes. Meanwhile, Verizon’s management expects a margin rebound as its new customers boost data revenue and $7 billion in cost cuts take effect.

Meeting margin forecasts will affect traders’ views, hence 2013 returns. But for those of us who are long-term investors, Verizon is still on the come, despite a soft econ­omy and a sometimes hostile Federal Communications Commission.

And there’s potential for a value-boosting surprise, should Vodafone (VOD) confirm marketplace rumors and sell its 45% stake in Verizon Wireless. Buy Verizon Communications.

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