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3 Things About Verizon Communications That Smart Investors Know

Motley Fool - Mon Jan 9, 2023

Verizon Communications(NYSE: VZ), the largest wireless carrier in the United States, is considered by many to be a stable blue-chip dividend stock for conservative investors. It currently pays a forward yield of 6.3% and trades at just 8 times forward earnings, and that high yield and low valuation could make it an attractive safe haven play as the bear market drags on.

However, Verizon's stock price has also declined more than 20% over the past 12 months as investors fretted over the slowing growth of its wireless business. I previously discussed those issues in depth, so today I'm going to dig deeper into three lesser-known facts about this telecom giant.

A person uses a smartphone.

Image source: Getty Images.

1. Verizon was once part of the original AT&T

The original AT&T(NYSE: T) was co-founded by Alexander Graham Bell in 1885 as a subsidiary of the Bell Telephone Company. Over the following century, AT&T became a monopoly that dominated the telecom market.

In the 1980s, the U.S. Department of Justice finally forced AT&T to split its sprawling business into several smaller companies known as the "Baby Bells." One of those Baby Bells was Southwestern Bell, which expanded and eventually acquired the original AT&T brand to become the "new" AT&T. Another Baby Bell was Bell Atlantic, which merged with the independent telephone company GTE in 2000 to become Verizon -- a portmanteau of veritas ("truth" in Latin) and horizon.

2. It didn't fully own Verizon Wireless until 2014

Prior to officially becoming Verizon, Bell Atlantic and the British telecom company Vodafone (NASDAQ: VOD) formed Verizon Wireless in 2000 as a joint venture to serve the growing mobile market. Verizon took a 55% stake in the new company, while Vodafone retained the remaining 45%.

But after Apple launched the first iPhone in 2007, the growth of the mobile market exploded as more smartphones arrived. To capitalize on that expansion and keep all of the profits, Verizon bought out Vodafone's entire stake for a whopping $130 billion in early 2014. Most of the $133 billion in long-term debt on Verizon's balance sheet (as of its latest quarter) was issued to fund that massive deal.

That debt gives Verizon a high net unsecured debt-to-adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio of 2.7, which it's been trying to gradually reduce with cost-cutting measures and divestments.

3. Verizon used to own AOL and Yahoo

Two of those recent divestments were AOL and Yahoo, which Verizon bought for a combined $8.9 billion in 2015 and 2017, respectively. Verizon believed it could turn around both aging internet companies, use them to launch fresh digital content, and generate more advertising revenue.

Verizon merged AOL and Yahoo into a new subsidiary called Oath to accomplish those ambitious goals, but it failed to gain much ground in the saturated digital media and advertising market. Verizon rebranded Oath as the Verizon Media Group in 2018, then sold the struggling subsidiary for just $5 billion to Apollo Global Management in 2021. Verizon retained a 10% stake in the company, which Apollo subsequently rebranded again as Yahoo.

Verizon's expansion into the digital media market flopped, but it wasn't as disastrous as AT&T's debt-fueled attempt to become a media titan with its acquisitions of DirecTV for $67 billion in 2015 and Time Warner for $85 billion in 2018. But even if Verizon had wanted to follow AT&T's lead, the debt it had accumulated from the Verizon Wireless deal would have prohibited it from making any comparable pay TV or media acquisitions.

What should investors expect from Verizon in 2023?

When Verizon posts its fourth-quarter earnings report on Jan. 24, investors will be looking for stabilization of its wireless business, which lost 36,000 postpaid phone subscribers in the first quarter and only gained a combined 20,000 postpaid subscribers in its second and third quarters. During that same period, AT&T added 2.21 million postpaid subscribers.

Investors will be looking for some improvements to Verizon's operating margins, which were compressed by competition, increased promotions, higher device subsidies, inflationary headwinds, and the removal of Verizon Media's higher-margin advertising revenue throughout 2022. A slight reduction in its net unsecured debt-to-adjusted EBITDA ratio would also be encouraging.

Verizon's downside potential might be limited at these levels, but its high debt, misguided media expansion, and sluggish wireless growth all highlight its past and present imperfections. Those issues all prevent me from classifying Verizon as a flawless evergreen stock for long-term investors.

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Leo Sun has positions in AT&T and Apple. The Motley Fool has positions in and recommends Apple. The Motley Fool recommends Verizon Communications and Vodafone Group Public and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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