Is Verizon a Value Investment?

Many will ask if Verizon is a value investment because the company controlled over one-third of the US wireless market in 3rd Quarter 2018. Yet, Verizon shares were trading at $55.37 on 22 July 2019.

Specifically, Verizon Communications (NYSE: VZ) had a 34.91% share of the US wireless subscription market in 3rd Quarter 2018, Statista estimates. In addition, Statista estimates Verizon had 151.48 million wireless customers in the United States in 3rd Quarter 2018.

If Statista is correct, over one third of Americans are Verizon subscribers. In detail, Worldometers estimated the US population at 329.093 million on 19 July 2019.

Why Verizon could be a Verizon Investment

Thus, Mr. Market could underprice a company with a platform that serves over one third of the American population.

Meanwhile, Verizon sells a product that many people cannot live without wireless service. In fact, 54.9% of Americans had no landline in 2018, Statista calculates. Therefore, 54.9% of Americans rely on wireless phones as their primary means of communications. Thu 54.9% of Americans need mobile phones to keep in contact with friends, family, and work.

Moreover, a growing number of those people rely on wireless as their primary source of information and entertainment. In fact, 169.5 million Americans admitted to watching videos on their phones in 2018, Statista estimates. Statista predicts that number could grow to 179.5 million in 2020.

Finally, people increasingly depend on wireless for basic needs like transportations. Notably, Statista estimates 36% of Americans used rideshare services such as Lyft (NYSE:LYFT) and Uber (NASDAQ: UBER) in 2018. Plus, the number of Americans using rideshare grew by 15% in 2018.

In particular, 38.7 million Americans used Uber in March 2018, and 16 million Americans took Lyft in January 2018. Consequently, 54.7 million Americans relied on phones for part of their transportation last year.

Is Verizon Making Money?

Thus Verizon is supplying an essential service that tens of millions of people need but is it making money? The answer the financial numbers provide is yes, Verizon is making a lot of money.

Stockrow reports Verizon reported a quarterly gross profit of $19.138 billion, a quarterly operating income of $7.709 billion, and a quarterly net income of $5.032 billion on 31 March 2019. In addition, Verizon generated those numbers from quarterly revenues of $32.18 billion.

However, Verizon’s quarterly revenues fell from $34.181 billion on 31 December 2018 to $32.128 billion three months later. Yet, Stockrow claims Verizon’s revenues grew by 1.12% in the quarter ending on 31 March 2019.

How Much Cash is Verizon Generating?

Therefore, Verizon is making a lot of money but how much cash it is it generating from all those wireless subscriptions. The answer is a lot.

Verizon reported a quarterly operating cash flow of $7.081 billion and a quarterly free cash flow of $2.813 billion on 31 March 2019. However, Verizon reported a negative investing cash flow of -$4.803 billion and a negative financing cash flow of -$2.657 billion on the same day.

Finally, Verizon is keeping very little of that cash. It had just $2.322 billion in cash and equivalents and no short-term investments on 31 March 2019.

Is Verizon Losing Money?

I think these figures show Verizon is losing a lot of money on its vast infrastructure.

To explain, Verizon should generate lots of float from the 151.48 million wireless subscriptions. Float is a stream of cash a company generates from regular subscription fees.

Importantly, float is a key component of Warren Buffett’s model of value investing. For instance, Berkshire Hathaway (NYSE: BRK.B) uses float insurance premiums generate to finance its operations and acquisitions.

Similarly, Verizon has made some impressive acquisitions. Most notably, Verizon bought the remains of Yahoo in 2016. Other notable Verizon acquisitions include Sensity Systems, Telogis, XO’s fiber-optic network, Volicon, Fleetmatics, AOL in 2015, and MCIWorldcom in 2006.

Consequently, Verizon owns a lot of potentially lucrative infrastructure. For instance, Sensity Systems provides services for the digital transformation of cities and the Internet of Things (IoT). Meanwhile Volicon provides video capture technology and workflow creation for broadcasters. Plus, Complex develops premium video content.

The Potential at Verizon

Thus, even if when it loses money, Verizon is acquiring value. Specifically, Verizon is providing the infrastructure for the digital transformation.

Instead of content like Netflix (NASDAQ: NFLX) Verizon provides the service that brings Netflix to the viewers. Verizon, is not building the internet of things (IoT) it is building the infrastructure the IoT could operate on.

Thus Verizon could make money from IoT; or streaming video, without taking the risks of building and providing those services. Additionally, Verizon profits from gig economy business like Uber, Lyft, GrubHub (NYSE: GRUB), and Instacart by providing the infrastructure those companies need to operate.

To explain, GrubHub, Instacart, Uber, and Lyft drivers cannot make money without a wireless subscription. Consequently, those drivers have a strong incentive to send Verizon a subscription each month. Thus, Verizon generates float from the gig economy.

Given these realities, I think Verizon has a lot of growth potential. However, the amount of cash it can generate from that growth could be small.

Is Verizon a Good Dividend Stock?

Verizon (NYSE: VZ) shares that cash with investors in the form of some impressive dividends.

For instance, Verizon plans a 60.3₵ dividend for 1 August 2019. Additionally, that dividend grew by 1.03₵ in 2018, rising from 59₵ on 1 August 2018 to 60.3₵ on 1 November 2018.

Impressively, credits Verizon with 12 years of dividend growth, since 2007. On 22 July 2019, Verizon offered investors a dividend yield of 4.26%, an annualized payout of $2.41 and a payout ratio of 51.7%.

In the final analysis, I think Verizon is a good long-term income stock. The company generates a lot of cash, pays a great dividend, and operates a large platform in a growing market. I think Verizon was a value investment at $55.37a share on 22 July 2019.