Verizon Communications Inc. (NYSE: VZ) may no longer be a growth company, although with its wireless phone business and recent buyouts of AOL and Yahoo! Inc. (NASDAQ: YHOO) might argue otherwise. It has mitigated investor risk that its revenue expansion will slow via the highest payout among all 30 Dow Jones Industrial Average components. Its current yield is 4.58%, calculated by an annual payout of $2.31 against a share price of $50.39
So far this year, many investors have not favored Verizon’s near-term future. Its shares have traded down 5.6%, while the Dow is higher by 5.8% to 20,915.
The primary criticism of Verizon is that it is actually shrinking. According to it fourth-quarter financials:
Total consolidated operating revenues in fourth-quarter 2016 were $32.3 billion, a 5.6 percent decrease compared with fourth-quarter 2015. Full-year 2016 revenues were nearly $126.0 billion, a 4.3 percent decline. Excluding revenues from since-divested local landline businesses and AOL, adjusted full-year total operating revenues on a comparable basis (non-GAAP) would have declined approximately 2.4 percent.
The telco can still claim one important advantage, which is the size of its wireless business:
Verizon reported 591,000 retail postpaid net additions in fourth-quarter 2016. These net additions exclude wholesale device and wholesale IoT connections. At year-end 2016, Verizon had 114.2 million retail connections, a 1.9 percent year-over-year increase. Verizon’s industry-leading retail postpaid connections base grew 2.1 percent to 108.8 million, and retail prepaid connections totaled 5.4 million.
The challenge of this business is that wireless subscription rates in the United States have reached saturation levels. Market share wars with rivals like AT&T Inc. (NYSE: T) have turned partially into price wars, a threat to margins.
Another sector of the broadband industry has also become crowded. Verizon’s FiOS internet and TV services are up against cable, other fiber offerings and satellite. And Verizon’s position is fairly modest:
In fourth-quarter 2016, Verizon added a net of 68,000 Fios Internet connections and 21,000 Fios Video connections. Customer demand for Custom TV continues to remain strong. At year-end, Verizon had 5.7 million Fios Internet connections and 4.7 million Fios Video connections.
Verizon’s foray into internet content, particularly its belief that online video and programmatic advertising will be a successful diversification, may work and work well. Yahoo is America’s largest portal, and Verizon is about to complete a deal to buy it. In the meantime, while the market waits for reasons to bid the stock up, its yield is extraordinary.