Verizon Communications (VZ) – Income Plus Potential Growth

Friday, November 19, 2010

Occasionally a stock classified as “income” dons “growth” garb. With its 6% dividend yield and burgeoning wireless growth prospects, Verizon Communications (VZ) appears to have done that.

The Wall Street Journal had an excellent article outlining Verizon’s wireless growth strategy: “Verizon Rethinks Pricing” (by Roger Cheng and Shayndi Raice, November 18, page B-3). Here are the key items from their interview with Verizon CEO Ivan Seidenberg:

Tiered pricing based on benefits, not limitations

The coming 4G network will allow premium pricing for speed, creating two levels of service based on benefits. Importantly, here is what Seidenberg’s response to the question about offering unlimited-data plans (which other companies have considered dropping).

“’I don’t think the world’s that simple,’ he said. ‘We need to get into it, figure out what the customer thinks is fair, and go from there.’”

(The results of Verizon’s customer focus can be seen in Consumer Reports’ “Guide to cell phone carriers.”)

To understand the importance of that highlighted phrase, just think about airlines and banks. A great way to kill customer loyalty and growth is to focus on increasing earnings by adding fees or cutting benefits. A growth firm’s real challenge is to deliver desired benefits at an acceptable price. The payoff:

“Verizon… is betting that its move to 4G will allow it to shake up its pricing model and better secure and attract the most affluent data-hungry customers.”

The article goes on to discuss the large growth in both wireless customers and usage that Verizon foresees – a true picture of growth.

Verizon and Apple

Are Apple (AAPL) and its products perfect examples of applied wireless technology? Yes. So, why did Apple pick AT&T (T) over Verizon for the iPhone? Because AT&T’s wireless technology better matched with Apple’s initial marketing strategy and AT&T was more willing to negotiate in favor of Apple’s distribution desires.

Verizon, meanwhile, was pursuing wireless technology it believed to be better suited to future growth and was unwilling to negotiate away its distribution prowess.

Now, it looks like the two leading companies are approaching a melding of their growth approaches.

“Mr. Seidenberg said his [Seidenberg’s] embrace of LTE [Long-Term Evolution wireless technology] has drawn the interest of Apple Inc. and helped Verizon get the iPad…. ‘If the iPhone comes to us, it’s because Apple thinks its time,’ he said. ‘Our interests are beginning to come together more, but they have to take steps to align their technology with ours.’”

Those highlighted words are the expressions of confidence and strength we want to see from a growth company head.

Industry consolidation

Growth industries typically consolidate as they “mature” (meaning they reach levels of customers/revenues/earnings that provide major points of industry strength and financial stability). Mr. Seidenberg believes wireless communications has reached such a point once again.

“’There are too many players in the industry,’ he said. ‘I think it would be healthy if there’s more consolidation.’”

Such consolidation would likely mean Verizon gains more clout as smaller, weaker companies concentrate on survival.

What about the rest of Verizon’s financial management?

In January, I criticized AT&T’s and Verizon’s financial management – “Wireless Wars Coming? – Beyond Red and Blue Maps.” To me, the use of large debt and paying out most of the earnings in dividends was inappropriate for today’s capital-intensive growth needs.

Now, however, I am less concerned by the financial management – for Verizon, at least. With financing and merger/acquisition activity back, I believe that Mr. Seidenberg has the resources available to accomplish his strategy.

Next up: January 2011’s Consumer Electronics Show

Verizon is likely to announce 4G developments and new 4G phones (and perhaps even Apple’s iPhone). Whatever the news, chances are that analysts will see more reason to associate Verizon with growth – unlike the previous ho-hum response described in “Verizon: iPhone! 4G! Stock market: Yawn. Why?” (October 8).


So… Verizon Communications’ businesses, strengths, strategies and management appear to offer the possibility of good things to come. Therefore, the company’s stock looks like an investment offering income plus growth prospects.


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November 2010