3 things savvy investors know about Verizon Communications

Verizon connections (VZ 0.22%), the largest wireless carrier in the United States, is considered by many to be a stable blue-chip stock for conservative investors. Currently paying a forward yield of 6.3% and trading at just eight times forward earnings, this high yield and low valuation could make it an attractive safe haven as the bear market continues.

However, Verizon’s share price has also fallen more than 20% over the past 12 months as investors worried about slowing growth in its wireless business. I’ve previously discussed these issues in depth, so today I’m going to dig deeper into three lesser-known facts about this telecom giant.

A person using a smartphone.

Image source: Getty Images.

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

the original AT&T (T -0.66%) It was co-founded by Alexander Graham Bell in 1885 as a subsidiary of the Bell Telephone Company. Over the next century, AT&T became a monopolist that dominated the telecommunications market.

In the 1980s, the US Department of Justice finally forced AT&T to split its sprawling business into several smaller companies known as “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 independent phone company GTE in 2000 to become Verizon – a brand of Veritas (“truth” in Latin) and Horizon.

2. It didn’t wholly own Verizon Wireless until 2014

Before it officially became Verizon, Bell Atlantic and British Telecom Vodafone (VOD 0.51%) Formed Verizon Wireless in 2000 as a joint venture to serve the growing mobile phone market. Verizon acquired 55% of the new company, while Vodafone retained the remaining 45%.

But then an Apple It launched its first iPhone in 2007, and the growth of the mobile phone market exploded as more smartphones arrived. To capitalize on this expansion and keep all of the profits, Verizon bought out all of Vodafone’s stake for $130 billion in early 2014. Most of the $133 billion in long-term debt on Verizon’s balance sheet (as of last quarter) was issued to fund that mega deal.

That debt gives Verizon a high unsecured debt to adjusted earnings (earnings before interest, tax, depreciation and amortization) ratio of 2.7, which it has been trying to gradually lower through cost-cutting measures and divestment.

3. Verizon used to own AOL and Yahoo

Two of these recent divestitures were AOL and Yahoo, which were bought by Verizon for $8.9 billion in 2015 and 2017, respectively. Verizon thought it could turn around both the legacy internet companies, use them to launch new digital content, and drive more advertising revenue.

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

Verizon’s expansion into the digital media market failed, but it wasn’t as disastrous as AT&T’s debt-fueled attempt to become a media giant with its acquisitions of DirecTV for $67 billion in 2015 and Time Warner for $85 billion in 2018. But even if Verizon wanted to If AT&T followed suit, the debt it ran into from the Verizon Wireless deal would have prevented it from making any similar television or media acquisitions.

What should investors expect from Verizon in 2023?

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

Investors will be looking for some improvement in Verizon’s operating margins, which have been compressed by competition, increased upgrades, higher device subsidies, inflationary headwinds, and the removal of Verizon Media’s higher-margin advertising revenue throughout 2022. A slight decrease in its net unsecured debt ratio is also Adjusted EBITDA would also be encouraging.

Verizon’s downside potential may be limited at these levels, but its high debt, misguided media expansion, and slow wireless growth all highlight its past and present shortcomings. All of these issues prevent me from classifying Verizon as a flawless evergreen stock for long-term investors.

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

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