Telecommunications giant Verizon Communications (VZ, Financial) started the year on a positive note, but it has recently started losing momentum. Since the end of July, Verizon shares are down almost 6%. Is this drop a buying opportunity, especially considering that rival Sprint (S, Financial) is making impressive moves to win over more customers to its side?Â
The competition is heating up
Sprint recently revealed its iPhone for Life plan with attractive features. This looks like a smart move on Sprint's part, as eliminating the down payment and offering customers an upgrade to a new iPhone every two years will attract more subscribers. However, this will also hurt other players, including Verizon. Sprint's aggressive pricing might force Verizon to take countermeasures in order to keep its customer base intact. Considering this situation, is Verizon a smart investment?Â
Verizon's moves
Verizon is currently executing its strategy that is aimed at offering network reliability along with superior customer experience. As a result, its consumer growth during the second quarter was recorded at 5.3%, driven by continued FIOS penetration and the healthy customer adoption of its broadband and video offerings.
Verizon is making investments to meet the expanding demand for data. Its capital investments are primarily focused on increasing capacity to improve its 4G LTE network, mainly by increasing the point spectrum and network density. Verizon is also accelerating the AWS spectrum deployment globally, and now has over 350 markets covered by its XLTE or AWSF.
Verizon’s capital investment strategy is directed toward increasing network capacity to support the rising adoption of the 4G devices, and it is focused on offering attractive plans such as MORE Everything to keep customers happy. In addition, Verizon is accelerating the adoption of 4G devices with tablet offers. As a result of this, its average retail connections per account increased by 3.7% to 2.8 during the second quarter.
Also, the addition of post-paid gross connections during the quarter was considerably higher, both on a sequential and year-over-year basis. The gross addition of 4.2 million postpaid connections was 18.1% above the year ago period. Thus, Verizon is moving in the correct direction with its strategies, as it is being able to increase its subscriber base.
Moreover, customers are also upgrading to higher plans. For instance, the post-paid upgrade rate increased to 7.1% last quarter on a sequential basis. Smartphones comprised of approximately 90% of the entire upgrades. Nearly 1.4 million, or 23% of its smartphone upgrades were from basic phones, which is a testament of the fact that Verizon's efforts to drive 4G adoption are gaining steam.
Better than Sprint
Now, the company's strong 4G network is a key factor that will play in its favor as more customers are moving to the faster network. Verizon has set up the largest LTE network in the U.S., covering 97% Americans across more than 500 markets, and provides twice the coverage compared to its rivals. Verizon carries approximately 76% of entire data traffic on the 4G LTE network, more than any of its competitors, according to management. Thus, this is an important advantage for Verizon to have, as a wide network coverage can attract more subscribers.
Finally, investors should also consider Verizon's robust cash position and cash flow. The company has $6.4 billion in cash, which is greater than Sprint's $5.5 billion. In addition, in the last twelve months, Verizon has generated operating cash flow of $36.5 billion, along with $28.3 billion in levered free cash flow. In comparison, Sprint stands nowhere near as it has generated just $1.52 billion in operating cash flow over the same period.
Also, from an investment point of view, Verizon looks like a better investment. It carries a robust dividend yield of 4.2%, while Sprint has none. In addition, Verizon is expected to grow at a faster rate of 6.45% a year as compared to Sprint's 5% in the next five years. Hence, despite tough competition from Sprint, Verizon still looks like a more worthy investment on the back of its strong network and fundamentals.
