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Verizon: Uninterrupted Dividends for More Than 30 Years

Founded in 1983 as Bell Atlantic, Verizon (VZ) is the largest wireless service provider in the U.S. The company’s 4G LTE network is available to more than 98% of the U.S. population. At the end of 2018, the company counted 118 million devices connected to its extensive wireless network.

Wireless operations, which include voice and data services as well as equipment sales, generate close to 70% of Verizon’s revenue and account for nearly 90% of the company’s EBITDA (a proxy for cash flow).

Wireline operations account for 23% of the company’s revenue but only about 12% of Verizon's EBITDA. This less-profitable segment includes traditional voice offerings, as well as pay-TV and internet services.

Verizon has paid uninterrupted dividends for over 30 consecutive years and has raised its dividend for 12 consecutive years. 

Business Analysis
Verizon's historical key to success has been delivering reliable wireless and wireline services over the best communications network in the country.

Verizon routinely invests more than $16 billion annually to increase the capacity and reliability of its wireless network. Thanks to its massive investments in capital equipment and spectrum licenses, Verizon’s 4G LTE network covers more than 320 million Americans today.

The company’s investments have also kept it at the top of RootMetrics’ rankings of wireless reliability, speed, and network performance. The chart below shows overall performance metrics for the big four carriers:
Source: RootMetrics

As you can see, Verizon continues to maintain a slight lead over AT&T (T) and remains well ahead of T-Mobile (TMUS) and Sprint (S), though those networks have closed some of the gap in recent years.

What's more, Nielsen awarded Verizon's network top honors and ranked its network as the best for streaming. JD Power also assigned Verizon's network top honors for the 23rd straight time.

The firm's network leadership position has been built over decades and at a cost of hundreds of billions of dollars, which has helped Verizon become the 9th most valuable brand in the world. Consumers and businesses trust Verizon’s network reliability and reputation for superior performance, and the company's thousands of brick-and-mortar stores keep its brand highly visible.

As long as Verizon continues to invest in its leading network coverage and architecture, the company should continue maintaining a massive base of customers. Disrupting Verizon’s base of customers would be almost impossible barring a revolutionary change in network technologies.

For one, growth in wireless subscriptions has slowed considerably with smartphone adoption now widespread. With new customer growth hard to come by, the industry has consolidated to become more productive and expand coverage. Verizon, AT&T, T-Mobile, and Sprint generate almost all of the industry’s revenue today.

Moreover, Verizon’s large subscriber base provides it with the cash flow needed to support and enhance its existing wireless network. Potential new entrants lack the subscriber base needed to fund a nationwide wireless network and acquire spectrum licenses, effectively keeping them locked out of the market.

Trying to win subscribers from Verizon would be extremely costly and impractical for a newcomer. It’s a lot easier to maintain an existing large base of subscribers in a mature market than it is to build a new base from scratch.

Simply put, new entrants lack the capital, spectrum, and subscriber base to effectively compete with any of the big four carriers in the U.S.

In addition to the industry’s high barriers to entry, the wireless communications market is also appealing because its services are non-discretionary in nature. The majority of the company’s revenue is recurring since consumers and businesses have a continuous need to communicate and use data, even during recessions.

As a result, Verizon’s post-paid monthly churn rate (i.e. the percentage of customers who leave) in its wireless business has been stable near 1% or lower, even in 2018 when T-Mobile induced a price war to earn market share.

Looking ahead, Verizon expects its wireless network to become increasingly valuable as people consume more data and video on devices connected to the internet. In turn, the company has gradually exited its wireline business to double down on wireless.

Thanks to this focus on wireless, Verizon has historically enjoyed a two-year advantage on its competitors when moving to the next generation network architecture. With almost all of its wireless data traffic now riding on the 4G LTE network, Verizon has already begun work to ready its network for 5G (fifth-generation) wireless technology, which is expected to deliver 30 to 50 times faster connection speeds than 4G.

With 5G, Verizon hopes to leverage the fast wireless internet speed connectivity of this new telecom standard to become a dominant internet service provider. The $65 billion U.S. residential broadband market, dominated by cable operators Comcast and Charter Communications, is Verizon's first target of opportunity.

Based on the latest pricing and internet speed data released by the company, Verizon's offering appears to be competitive compared to traditional home internet services available today. Of course, winning customers over in a mature market is easier said than done, so it remains to be seen just how meaningful this opportunity will be. 

However, management believes 25% to 30% of the home internet industry is addressable by 5G technology, potentially disrupting the oligopolistic home internet market while providing a meaningful growth avenue for the firm.

While 5G's impact on mobile devices is a little further down the road, its significantly faster speeds and responsiveness could be game-changers for many parts of the technology industry, including self-driving cars, robotics, virtual reality, and smart cities. Accelerated growth in these areas, fueled by much faster connectivity, could cause data usage to explode even higher, further increasing the value of reliable wireless networks. 

It will take years before the impact of 5G technology is fully known, but in the interim Verizon seems likely to remain a key player serving the communications needs of millions of consumer and businesses.

All said, while Verizon's recession-resistant business model and generous dividend make it an attractive income stock, there are still risks investors need to consider.

Key Risks
Arguably the greatest uncertainty facing Verizon is future growth in wireless. Subscriber growth has slowed to a crawl as U.S. smartphone penetration has more than tripled since 2010 to exceed 85% today, according to a studyconducted by the Consumer Technology Association.

The industry's saturation has at times caused the big four carriers to fight each other more aggressively for existing subscribers rather than behave like a rational oligopoly. Even the pending T-Mobile-Sprint merger doesn't necessarily ensure a future price war won't pop up. T-Mobile is famous for its Amazon-like approach to trying to win market share at the expense of short-term profits.

It's also become less painful for customers to switch providers as T-Mobile and Sprint have worked hard to improve their networks' coverage and quality. While the two firms still score below Verizon's network almost across the board in quality and coverage measures, the gap has narrowed.

Furthermore, with over 70% of U.S. counties having coverage from at least four wireless providers, according to data from Mosaik cited by The Wall Street Journal, consumers have more options than ever before.

There are also risks with Verizon's 5G investments, which are still in the early days and far from proven. As competitors invest heavily in 5G and non-traditional rivals, such as Google and Facebook, explore creating their own mobile wireless networks and internet services, the telecom sector seems likely to continue evolving faster than ever.

Verizon hopes that 5G will make the company a leading name in internet while the firm maintains its lead in U.S. wireless. However, increased competition from T-Mobile and others could result in 5G not proving to be the growth catalyst hoped for.

Closing Thoughts on Verizon
If one thing is clear, the telecom industry is undergoing a meaningful evolution. Content, media, and communications are converging like never before, and Verizon is one of many players working to reinforce its position in the market.

For now, Verizon appears to remain a reliable income stock, one that seems likely to continue its streak of paying uninterrupted dividends for more than 30 consecutive years. The company’s scale, hard-to-replicate network assets, mission-critical services, brand recognition, and massive subscriber base remain important competitive advantages.

Overall, Verizon seems likely to continue generating predictable results in the years ahead. However, investors should keep a close eye on future developments in the wireless market, especially given the company's capital intensity and large debt load.

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