This top telecom will use its purchase of Yahoo! to expand revenue and earnings as demand for wireless and TV services slows.
VERIZON COMMUNICATIONS INC. (New York symbol VZ, www.verizon.com) has 113.7 million wireless users, 14.2 million landline phone clients and 15.6 million high-speed Internet and TV subscribers.
The company is buying the Internet search business and related websites of Yahoo! Inc. (Nasdaq symbol YHOO). These operations attract over 1 billion active users every month.
The purchase looks like a good fit with AOL, which Verizon acquired in 2015 for $4.4 billion. That business operates several popular websites, including The Huffington Post, TechCrunch and Engadget.
Adding Yahoo should help Verizon with its plan to offer more video content to its TV and mobile phone subscribers. It will also let the company capture a larger share of the fast-growing online advertising market.
Verizon originally agreed to pay $4.8 billion for Yahoo. But it will probably demand a lower price after Yahoo disclosed that online intruders stole the private data of 500 million users. That could have a significant impact on Yahoo’s brand and ad revenues. The company still expects to complete the purchase in the first quarter of 2017.
Meanwhile, Verizon earned $3.6 billion, or $0.89 a share, in the three months ended September 30, 2016. That’s down 10.1% from $4.0 billion, or $0.99 a share, a year earlier. However, if you disregard unusual items, such as charges related to employee pensions, Verizon earned $1.01 a share in the latest quarter.
Growth Stocks: Revenue fell 6.7% in the quarter
Overall revenue in the quarter fell 6.7%, to $30.9 billion from $33.2 billion.
Revenue from the wireless business (75% of the total) declined 3.9%. That’s because more of its customers are choosing plans with lower monthly fees. These agreements separate out the cost of the phone and often leave the telephone service as the only recurring bill. Customers usually pay upfront for their devices.
Revenue from the wireline operations (25% of revenue) fell 2.3%. Lower demand from business clients offset stronger sales of high-speed Internet and TV services to consumers.
Verizon will likely earn $3.99 a share for all of 2016, and the stock trades at a moderate 12.0 times that forecast.
The company also recently raised its quarterly dividend by 2.2%, to $0.5775 a share from $0.565. The new annual rate of $2.31 yields 4.8%. Verizon has now increased its dividend each year for the past 10 years.
In the past year, dividends accounted for 78.8% of Verizon’s free cash flow (cash flow less capital expenditures).
Recommendation in Wall Street Stock Forecaster: BUY
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