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It takes a lot to get Larry Sarbit interested in a stock, which explains why his IA Clarington Sarbit U.S. Equity Fund is about 40 per cent in cash.

But mention Verizon Communications Inc., and the Winnipeg-based money manager starts sounding excited. He began buying shares of the U.S. telecommunications company in 2009 and now it's his biggest holding, accounting for nearly 10 per cent of his fund.

"This is the kind of business we love," he said.

As the largest U.S. wireless provider, Verizon has several things going for it, Mr. Sarbit explained. It sells an essential, utility-like service to more than 90 million customers. It's adding several hundred thousand subscribers every quarter. And the stock sports a rich dividend yield of 6.4 per cent.

Perhaps most important, Verizon's free cash flow is poised to grow over the next few years as the company completes an ambitious rollout of its FiOS high-speed, fibre-optic Internet and TV service, complementing its strength in wireless.

With capital spending on FiOS poised to fall by several billion dollars after 2010, that will free up more cash for dividends and buybacks.

"They will in all likelihood raise the dividend once this capital expenditure is done," Mr. Sarbit said.

Yesterday, Verizon said first-quarter profit fell 75 per cent to $409-million (U.S.), or 14 cents a share, from $1.65-billion, or 58 cents, a year earlier. Excluding costs related to U.S. health-care reform, profit of 56 cents a share matched analyst estimates. But the stock sank about 1 per cent as the number of postpaid wireless customer additions missed expectations.

Still, Verizon reported a 25.6-per-cent increase in free cash flow, to $3.7-billion, citing strong growth in FiOS, cost-reduction initiatives and a "disciplined approach to capital investment."

"Customer demand for broadband, such as a growing demand for wireless data, has improved revenue trends, and we are beginning to see signs of economic recovery, particularly in business markets," chairman and chief executive Ivan Seidenberg said in a statement.

Given intense competition and slowing growth in the wireless market, not everyone thinks the stock is a slam dunk. Of the 36 analysts who follow the company, 20 rate the stock a "hold," and the rest have it as a "buy," according to Bloomberg.

Rick Franklin, analyst with St. Louis-based Edward Jones, is in the show-me camp. The FiOS rollout has weighed on cash flow and profits, but he expects Verizon's bottom line to improve as the fibre-optic investment - seen as critical to Verizon's growth - matures.

"They've made it an all-in bet for them. They've spent a lot of money on it. I think it's pretty important that it works now," he said. "The biggest risk for them is getting a return on that investment in FiOS."

As for the dividend, the $1.90 a share Verizon is paying annually represents a payout ratio of 79 per cent based on 2009 earnings. While that number is high, he doesn't expect a dividend cut any time soon.

Yesterday, Verizon chief financial officer John Killian hinted at future dividend hikes, throwing cold water on speculation that the dividend might be at risk owing to the fact that Verizon owns just 55 per cent of Verizon Wireless, with the rest held by Britain's Vodafone Group.

"I want to make sure from our perspective that our shareholders understand that we view the dividend as being very safe," Mr. Killian said in a conference call. "We are a business that generates lots of cash flow … We have a lot of different levers that we can pull to make sure that we have the ability to pay the dividend. Being in a position to recommend to the board dividend increases is highly, highly important to us."

In a detailed report on the U.S. telecom industry, National Bank Financial analyst Greg MacDonald said that Verizon has "arguably the best future free cash flow growth potential of any U.S. telco. The main reason is that its FiOS broadband capex budget is set to decline by roughly [$2-billion]post-2010."

FiOS "has made noticeable share gains since its inception in 2005 and subscriber growth remains strong. In our view, this is the biggest differentiator for Verizon versus other telco stocks," added Mr. MacDonald, who rates Verizon "outperform" with a price target of $35.

Yesterday, Verizon said it had 3.6 million FiOS Internet and three million FiOS TV customers at the end of the first quarter.

Despite strong customer reception to FiOS, Verizon's stock, which closed yesterday at $29.28, didn't participate in the market rebound of the past year. Nor did other telecom stocks, which are seen as defensive plays that are less sensitive to swings in the economic cycle.

Verizon's sluggish performance also reflects investor disappointment that the company still doesn't carry the popular iPhone, although there's speculation that could change in the next few years.

With or without the iPhone, Mr. Sarbit thinks Verizon's stock is a good bet. He predicts the shares will ultimately climb as the company returns more and more cash to shareholders.

In the meantime, he said, "I'm getting paid 6.4 per cent just to sit here."

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