VERIZON COMMUNICATIONS INC. $31 (New York symbol VZ; WSSF Rating: Average) provides local and long distance phone service to 145 million customers in 29 states. Through 55%-owned Verizon Wireless, it offers wireless service to 49 million customers across the United States. It also provides Internet access to homes and businesses, and publishes telephone directories.
In January 2006, Verizon acquired long distance provider MCI, Inc. for $8.5 billion in cash and stock. The company hopes that MCI’s large corporate client base and fiber optic network will help it keep up with its main rivals, who are using acquisitions to expand market share.
MCI will add about $15 billion to Verizon’s annual revenues of about $75 billion. However, integration costs may hurt Verizon’s earnings growth in the next two to three years. Verizon probably earned $2.55 a share (total $7 billion) in 2005.
Verizon’s wireless business provides 40% of its revenues and is growing strongly. But rising competition from cable and Internet-based telephone services is cutting into Verizon’s local service revenue.
The company is now looking for new ways to cut costs. A plan to restructure the pension plans of non-union workers should reduce Verizon’s pension costs by $3 billion over the next 10 years. The company may also sell its directories business to offset the cost of the MCI purchase.
We feel MCI gives Verizon the size it needs to compete. However, merger and integration costs will probably limit Verizon’s 2006 profit to $2.58 a share, and the stock now trades at 12.0 times that forecast. The $1.62 dividend seems safe, and yields 5.2%.
Verizon is a buy.