The No. 1 Reason to Like VZ Stock
Since speculation that Verizon Communications Inc. (NYSE:VZ) is the frontrunner to acquire Yahoo! Inc. (NASDAQ:YHOO), Verizon stock has soared 15%. However, VZ stock’s most attractive feature is its dividend. Verizon has a sustainable competitive advantage. It has a dominant position in the U.S. telecommunications space, as well as strength in Europe and elsewhere. Verizon also gives priority to the dividend.
Verizon enjoys a market share of more than 30% in the U.S. wireless market, putting the competition to shame. VZ stock has also gained strength by skirting the worst effects of the financial crisis in the past years. Verizon also operates in a business where customers maintain a brand loyalty—whether they love the brand or not.
Consumers procrastinate switching phones. They may be afraid to lose their number or all the contacts, music collections, and messages. This applies to Internet customers as well. As it happens, Verizon offers both.
Apart from operating in a business with high customer retention, Verizon distributes stable and consistent dividends. They currently are around 4.5% (or more, according to Morningstar). Over the past 12 months, Verizon has generated $18.8 billion of cash flow. Of that amount, Verizon used 45%, or $8.5 billion, to pay dividends. (Source: “Verizon Stock: A Dividend Analysis (VZ),” Investopedia, January 22, 2016.)
Verizon’s current dividend policy is more conservative than generous. It also suggests a certain reliability and resilience long-term. Verizon’s major challenge for the future is how to confront falling landline and wireless growth. Verizon stock, after all, can only keep growing as long as Verizon expands its customer base. The need to offset these blemishes on an otherwise solid business is the acquisition of Yahoo stock.
Yahoo has value. It offers Verizon a web portal, a news site, Yahoo! News, and its Yahoo! Mail e-mail service. That aspect alone carries strong market value. There are millions of Yahoo! Mail users and they are reluctant to change their service.
Shortly after Yahoo announced dismal quarterly results, in February, CEO Lowell McAdam confirmed Verizon’s interest in Yahoo. Verizon has already made a move in the Internet space by acquiring AOL for $4.4 billion and a possible Yahoo acquisition makes sense.
In acquiring Yahoo, Verizon would simply act as a catalyst. Indeed, former Yahoo CEO Carol Bartz and AOL boss Tim Armstrong had talked about merging their companies. Current Yahoo CEO Marissa Mayer scrapped that possibility in 2014.
Now, Verizon, which bought AOL last May for $4.4 billion, is in a position to deliver the merger of the two Internet pioneers. The deal would give Verizon the chance to link its 112 million Internet subscribers to various Yahoo services, from e-ail to finance sites, sports, videos, or news. Verizon would also gain access to a wider advertising market, linking its video “Go90” streaming platform to YouTube and Facebook. (Source: “Verizon taps AOL CEO Tim Armstrong to explore potential Yahoo bid,” The Globe and Mail, February 8, 2016.)