Verizon Communications Inc. (NYSE:VZ) is a frontrunner to buy Yahoo! Inc. (NASDAQ:YHOO) and will launch a first offer for the embattled Yahoo’s Internet business. Verizon stock, popular among investors for its dividend, gained a half-percentage point on the rumor.
Shortly after Yahoo announced dismal quarterly results in February, Verizon’s CEO, Lowell McAdam, confirmed the company’s interest in Yahoo and Yahoo! Japan. (Source: “Verizon to Proceed With Yahoo Bid, Google Weighs Offer,” Bloomberg, April 8, 2016.)
A Yahoo acquisition would complement Verizon’s business and boost Verizon stock. Indeed, last December, Fran Shammo, CFO of Verizon Communications, was among the very first to observe that Verizon would pursue Yahoo’s Internet assets if the company felt there was a strategic benefit to acquiring Yahoo and if the acquisition offered added shareholder value. (Source: “Verizon Would Explore Yahoo Deal If It Made Sense, CFO Says,” Bloomberg, December 7, 2015.)
Yahoo has value. It offers Verizon a Web portal, a news site (Yahoo! News), and an e-mail service (Yahoo! Mail)—that last aspect alone carries strong market value. There are millions of Yahoo! Mail users who are reluctant to change their service. Verizon has already made a move in the Internet space by acquiring AOL for $4.4 billion.
Fifteen analysts have given Verizon stock a “Hold” rating, while 11 others have issued a “Buy” rating. Verizon stock has a consensus rating of “Hold” and an average target price of $51.84. (Source: “Verizon Communications Inc. (VZ) Now Covered by Analysts at Macquarie,” The Vista Voice, April 6, 2016.) As it happens, Verizon is now trading at $52.06.
Through Yahoo, Verizon gains the opportunity to link its 112 million Internet access subscribers to various Yahoo services, such as its e-mail, finance, sports, video, or news sites. 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.)
Verizon’s Yahoo acquisition concerns its core Internet business. This means messaging, search, and news sites. Candidates interested in the assets have until April 11 to come forward with offers. So far, Yahoo’s main rival might be Google. However, Time, publisher of the eponymous magazine, Sports Illustrated, and People, said it would link up with an investment fund to launch a bid for Yahoo’s Internet activities, meaning Verizon has some competition in the race to acquire Yahoo’s Internet assets.
Having said that, those who don’t find Verizon’s interest in Yahoo compelling should consider Verizon stock’s most attractive feature: its dividend.
Of course, 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 enjoys a market share of more than 30% in the U.S. wireless market, putting the competition to shame. Verizon stock has also gained strength by skirting the worst effects of the financial crisis in the past years and operates in a business where customers maintain a brand loyalty—whether they love the brand or not.
As for its dividend, the company gives priority to it—shareholders as of April 8 will receive a quarterly dividend worth $0.565 per share. This represents a $2.26 annualized dividend and a dividend yield of 4.15%. (Source: “Verizon Communications Inc. (VZ) to Issue Quarterly Dividend of $0.57 on May 2nd,” Financial Market News, April 5, 2016.)
Verizon distributes stable and consistent dividends. They currently are around 4.5%, or more according to Morningstar. (Source: “VZ Verizon Communications Inc.,” Morningstar, last accessed April 11, 2016.) 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 in the long term. The company’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 the company expands its customer base. The need to offset these blemishes on an otherwise solid business is the acquisition of Yahoo stock.