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Verizon -- Another Strong QuarterLast Update: 06-Nov-09 14:09 ET 
Verizon Communications reported its earnings on Monday, Oct. 26, 2009. The company beat both earnings and revenue estimates, while also showing strong growth in the cellular customer base. Progress in the growth of the FiOS customer base, a key element of our long-term investment premise, slowed considerably, but was still strong. We view the results as a good confirmation of our long-term investment premise and advise investors following our long-term premise to continue holding the stock. The following table highlights the earnings results for Verizon's FY2009 third quarter, ended Sept. 30, 2009.
Source: First Call and Verizon These results are obviously very positive, and the stock reacted well to this news. For the purposes of our long-term investment premise, however, we do not focus heavily on whether the company met estimates or not. Key Results For Our Long-Term Investment PremiseOur long-term investment premise for Verizon has always been based upon the idea that the convergence of digital services on the FiOS network will eventually prove to be a strong competitive advantage. There are three elements to the idea that the FiOS network will become a strong competitive advantage:
This quarter, this idea was given additional credence in several ways. First, Verizon showed results showing them to be the least expensive operator of cellular services. While the cellular network is still separated from the FiOS network, it does demonstrate that "economy of scale" works in large networks. Data was not shown for cost-effectiveness of the FiOS network, but we believe that network will eventually show similar savings when scale is reached. Secondly, the competitive nature of the cellular customer base was strongly reinforced, as Verizon's wireless base grew by 25% this quarter (year-over-year) to an astonishing 89 million customers. In addition, churn remained at a continually low rate for the industry. This means Verizon has an existing customer base to convert to the FiOS network, once cellular phone services become integrated into the network. While there was no mention of such integration, we believe it is inevitable in the coming years. There was also no mention of potential new services for the FiOS network, but with so much unused capacity on the network (on a per-customer basis, not on the system-wide basis), this potential is also likely to be an inevitable, although unpredictable, advantage. Growth of the FiOS Customer BaseGrowth of the base of FiOS customers slowed this quarter, in contrast to the strong growth in recent quarters. The following table illustrates the recent growth in this base.
Source: Verizon These are still fairly strong growth rates, although the slowing down this quarter of the growth rate is somewhat disappointing. Nevertheless, we still view the growth rates as very encouraging signs of the continued growth of the FiOS customer base. Also encouraging this quarter was Verizon's statement that FiOS triple play offerings was now available to more than 10 million homes, or approximately one-third of the FiOS customer potential customer base. Verizon has not published data on how many of their FiOS customers purchase triple-play options. While we would very much like to see such data, we suspect that Verizon has been waiting until their triple-play offering is more widely available before publishing such data. The principal reason triple-play offerings are slow to roll out is that Verizon must gain regulatory approval in each and every municipality where it offers FiOS TV. While the company has never been denied a TV permit, the time consumed in the local meetings and regulatory proceedings is extreme. At some point, Verizon will have permits in all of the locations where the FiOS network is installed, we believe. Nevertheless, the establishment of triple-play offerings in more than 10 million homes is a positive sign for our long-term investment premise. DividendMuch of our long-term premise is based upon the unfolding of the FiOS network and the development of new services, but we admit to not having a timetable for the rollout of these services. This means that an investor seeking to use this investment premise must have considerable patience and a high tolerance for price volatility. We think the recent declines in the past months for VZ stock are attributable to market conditions rather than company specific conditions, but this only underscores the need for patience. Fortunately, Verizon's very high dividend rate of more than 6% is a nice compensation for the requirement for patience. Verizon's dividend now stands at $0.475 per quarter, or $1.90 per year. At price levels of $29.50, that is equivalent to a 6.4% dividend rate. It is very difficult to find another company that pays so high a dividend, which is very secure based on cash flow trends, that also has such a strong growth potential. We view Verizon as a perfect vehicle for tax-deferred accounts such as retirement accounts for this very reason. ConclusionsWhile strong growth in the FiOS customer base slowed somewhat, we still view the results as very positive indications of the growth of this base. In the past, growth rates have become stronger as the base grew larger, which is contrary to most growth curves. The eventual slowing down of the growth of the FiOS base was to be expected. Whether this quarter's results are an indication of that eventual slowing, or prove to be only a temporary "blip" in the overall growth trend -- as has happened in the past -- remains to be seen. We continue to recommend holding Verizon Communications for investors following our long-term investment premise for the stock. Note: The author has a personal position in Verizon Communications, which was established and is maintained in accordance with Briefing.com's Trading Policy. Comments may be e-mailed to the author, Robert V. Green, at rvgreen@briefing.com |
