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Motley Fool: Verizon’s value can’t be ignored

Sun., June 8, 2014, midnight

There’s a good chance you’re already its customer, but you might want to be a shareholder, too. Verizon Communications (NYSE: VZ) is a telecommunications giant, offering prodigious free cash flow, a generous dividend yield (recently near 4.3 percent) and an attractive valuation.

It has a strong brand name and competitive advantages that keep rivals at bay. Providing nationwide cable, Internet and phone service is nearly impossible for newcomers due to the extremely high costs of building out a network. This means barriers to entry are very high, resulting in reliable profits. Indeed, Verizon generates more than $20 billion in free cash flow annually. It distributed nearly $6 billion in dividends to shareholders last year, and has been upping its payout annually for years.

In addition, Verizon has a clear catalyst for continued future growth, thanks to its highly profitable Verizon Wireless business, which is the largest and most profitable wireless carrier in the United States. In its last reported quarter, Verizon Wireless increased service revenue by 7.5 percent, outpacing the overall company’s 4.8 percent revenue growth. The wireless business should provide plenty of cash flow to support the company’s hefty dividend for a long time.

With its steady growth and a price-to-earnings (P/E) ratio recently near 11 (well below the S&P 500’s 18), Verizon stock is compellingly priced and worth considering.

Ask the Fool

Q: Why would a stock end a trading day at one price and then begin trading the next morning at a very different one? – C.D., Ocala, Florida

A: Maybe there was a stock split, or some news or rumors emerged after the market closed. Perhaps the company is being bought out, or maybe it reported surprisingly good or bad earnings. Such developments can cause buy or sell orders to pile up overnight, resulting in big overnight price moves. Stock prices simply reflect supply and demand. If many are selling, the price drops – and vice versa. After-hours trading is another factor, as it has grown in popularity.

Q: How does stock ownership work? If I own 5 percent of a company’s stock and the company earns $100 million, do I get 5 percent of that, or $5 million? – M.H., Saginaw, Michigan

A: Not exactly. If you own stock in a public company, you do own a real chunk of it, though usually a tiny one. But its earnings aren’t automatically distributed to its owners.

Companies have choices regarding their earnings. For example, they might pay some out to shareholders as dividends, or pay down debt, or reinvest in the business by building factories, hiring more workers, buying advertising and so on. They may also buy back some of their stock or buy another company, or simply bank the money, waiting for opportunities.

All these options can reward shareholders, sometimes even more powerfully than if the money were just distributed as dividends. Buying back (and essentially canceling, or retiring) shares, for example, boosts the value of the remaining shares. Reinvesting in the business can result in a bigger, more profitable company – with higher earnings.

My dumbest investment

My dumbest investment was buying shares of Groupon at its 2011 initial public offering, for close to $20 apiece. They’re near $5 now, and I’m still waiting for them to get back to my purchase price. – S., online

The Fool responds: The story of Groupon is similar to many other companies that have debuted on the stock market via IPOs. It went public with a lot of buzz, and shares quickly rose into the mid-$20s. A year later, though, shares were near $4. The stock has recently been trading around $6. What went wrong?

Well, the company has yet to turn a profit. It has no sustainable competitive advantage, as its daily deal concept is fairly easy for others to copy, and deal-seekers have little loyalty to it. Its business model is problematic, too, requiring lots of salespeople to get local businesses to offer Groupons.

With IPOs and all stocks, be sure you understand how the company is going to prosper. And if you’re underwater on a stock you no longer believe in, sell and move the money that’s left to a more promising investment.


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