Verizon Communications Inc.

VERIZON COMMUNICATIONS INC. $38 (New York symbol VZ; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 2.9 billion; Market cap: $110.2 billion; WSSF Rating: Average) is slowly shifting away from its traditional telephone business into areas with higher growth potential. For example, it recently acquired business communication specialist MCI Inc. and spun off directory publisher Idearc Inc. Verizon has now agreed to sell its phone operations in Vermont, New Hampshire and Maine to FairPoint Communications Inc. (New York symbol FRP). The $2.7 billion price, about 2.5% of Verizon’s market cap, consists of $1.0 billion in FairPoint stock and $1.7 billion of debt securities. Verizon will probably use these securities to cut its long-term debt of $30.1 billion (0.65 times equity). Verizon plans to hand out its new FairPoint shares to its own investors — one for every 55 Verizon shares held — as a tax-deferred dividend. Verizon investors will own 60% of the combined company....

IDEARC INC. $31 (New York symbol IAR; Income Portfolio, Consumer sector; Shares outstanding: 146.0 million; Market cap: $4.5 billion; WSSF Rating: Average) publishes over 1,200 white pages and yellow pages directories in 35 states. The company is the former directories division of Verizon Communications Inc. In November 2006, Verizon spun off Idearc to its stockholders as a tax-deferred dividend of one Idearc share for every 20 Verizon shares held. Idearc has a 30-year deal to supply Verizon with directories, which cuts its risk. Revenue from directories has weakened in the past few years, as more people use the Internet to locate individuals and businesses. Rising paper and transportation costs have also squeezed profits. But Idearc owns SuperPages.com, a leading online directory....

Many studies show that one of the best ways for a company to unlock hidden value is to spin off a subsidiary as a separate company. Shares of the new company sometimes fall in the first few months, as many investors tend to sell their new stock. But over time, both the parent and the spin-off usually outperform comparable stocks. In the past two years, several of our recommendations have completed spin-offs. All of these new companies have done well. That’s not surprising, since they came from well-managed parent companies with long histories of rising profits. Here are five recent spin-offs. We like all of them, but only three are buys right now....

INTEL CORP. $20.82, Nasdaq symbol INTC, earned $0.26 a share in the fourth quarter of 2006, down 35.0% from $0.40 a year earlier. The company began expensing stock options in 2006, which cut its earnings in the most recent quarter by $0.04 a share. Restructuring costs also weighed on earnings in the latest quarter. Revenue fell 4.9%, to $9.7 billion from $10.2 billion, due to a price war with rival chipmaker Advanced Micro Devices. But Intel spent 17% of its 2006 revenue of $6.10 a share on research, so it’s more profitable than it looks. The company is phasing out older chips in favor of its more powerful dual-core and quad-core chips. But Intel is still ramping up production of these new products. The costs of running plants below full capacity cut its gross profit margin in the fourth quarter to 49.6% of revenue, from 61.8% a year earlier. Intel feels its margins will hover around 50% in 2007. The news spooked investors, and the stock fell roughly 7%. But Intel’s new chips should help it win back market share it lost to AMD in the past two years, particularly as next month’s release of the new Microsoft Windows Vista operating system spurs computer sales....

ARKANSAS BEST CORP. $39.75, Nasdaq symbol ABFS, has struggled in the past few months, as weaker sales of consumer and industrial goods hurt demand for its trucking services. Rising fuel costs and upgrades to its fleet also squeezed profits. But the stock jumped several dollars this week, partly in response to the dive in oil prices, which will cut its fuel costs. In addition, retailers will soon have to re-stock their stores after the busy Christmas buying season. The stock is still cheap at just 11 times earnings, while the $0.60 dividend yields 1.5%. Arkansas Best is a buy for aggressive investors. IDEARC INC. $29.53, New York symbol IAR, was a wholly owned subsidiary of Verizon Communications until November 2006, when Verizon spun off Idearc through a special dividend of one Idearc share for every 20 Verizon shares they held....

VERIZON COMMUNICATIONS INC. $35 (New York symbol VZ, Conservative Growth Portfolio, Utilities sector; WSSF Rating: Average) has spun off its directories business as a separate company called IDEARC INC. $29 (New York symbol IAR; Income Portfolio, Consumer sector; WSSF Rating: Average). Idearc publishes over 1,200 yellow pages and white pages directories in 35 states. It also owns SuperPages.com, a major online directory service. Verizon investors received a special dividend of one common share of Idearc for every 20 shares held. Stockholders will only be liable for capital gains taxes when they sell they new shares....

VERIZON COMMUNICATIONS INC. $33 (New York symbol VZ; Conservative Growth Portfolio, Utilities sector; WSSF Rating: Average) is investing heavily to expand its wireless networks, and replace traditional copper phone lines with high-speed fiber optic cables. These upgrades should help it attract new customers, and offer new services such as TV programs and games. As part of this strategy, Verizon will probably either sell or spin off its telephone directories business by the end of this year. This business accounts for about 5% of its total revenue, and is facing growing competition from online search services. A straight sale would give Verizon more cash to upgrade its networks. However, it would have to pay tax on the proceeds....

WEYERHAEUSER CORP. $60 has raised its quarterly dividend for the second time since April 2005, from $0.50 a share to $0.60. It now yields 4.0%. Earnings have improved and the company is still the world’s biggest holder of softwood timberlands. Buy. VERIZON COMMUNICATIONS INC. $33 plans to discontinue its Airfone service, which lets airline passengers make phone calls from special units built into the back of seats. Verizon prefers to invest in its ground-based wireless networks, rather than upgrade its aging Airfones to compete with new services that offer air travellers high-speed Internet access. Buy. PEPSICO INC. $59 plans to build a new facility in Oklahoma that will specialize in sport drinks, particularly its top-selling Gatorade brand, and flavored waters. Demand for these products is growing strongly, and this plant will help expand PepsiCo’s sales in several southeastern states which are major markets for it. We now see PepsiCo as a buy for long-term gains.

Some investors fear that Voice over Internet Protocol (VoIP) will be the death of companies like Verizon, because it lets phone calls bypass the phone companies and travel over the Internet. We doubt that, since established phone companies are bundling services and taking other steps to maintain their profits. However, some companies are sure to profit from VoIP. Avaya is likely to be one of them. That’s why we are adding it to our WSSF Portfolio for Aggressive Growth. AVAYA INC. $10 (New York symbol AV; WSSF Rating: Average) makes telecommunications equipment that helps over one million businesses and government agencies manage their phone and data networks. Avaya was a division of Lucent Technologies Inc. until September 30, 2000, when Lucent handed out its Avaya shares to its investors....

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....