Verizon Communications Inc. (VZ): Is This Dow Dividend Stock Doomed?

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May 14, 2015 11:38am ETF BASIC NEWS

wall-street-etfIan Wyatt: The Dow dividend stock with the highest yield just announced an acquisition. The deal is getting lots of praise from the financial media and Wall Street analysts. But like most acquisitions, it doesn’t make a ton of sense.


That company is Verizon (NYSE:VZ), and it plans to acquire AOL (NYSE: AOL) in a $4.4 billion deal.

Verizon stock has become a favorite among income investors, thanks to its healthy 4.4% dividend yield. That makes Verizon the highest yielding stock in the Dow Jones Industrial Average.

Verizon stock has underperformed the stock market over the last two years. During this period, the stock has fallen 7.4% versus an 18% gain for the Dow. That performance obviously overshadows the company’s big dividend.

Verizon generates its revenues from wireless and wireline services. Wireless services include mobile phone plans, including voice, data, text messaging and other services. Meanwhile, the wireline business includes phone lines, DSL, high-speed Internet access and bundled services.

Last year, 70% of Verizon’s revenues came from the wireless business. This business has grown 15% over the last two years. Meanwhile, the wireline business has declined slightly.

Verizon is a decent dividend stock. But it’s hardly a growth stock. This year, the company’s sales are expected to grow just 3%. Next year is even worse, with growth estimates of just 1%.

What’s the problem? The company’s core business is a commodity. Access to a mobile network or high-speed Internet at home is a highly competitive business.

Consumers have little allegiance to their provider, since service differentiation is minimal. The only reason people stick with their current provider is out of convenience or due to long-term contracts.

Verizon is working to overcome this challenge by expanding into new areas. One of those areas is online content. And that’s where AOL fits in.

CEO Tim Armstrong has been working since 2009 to transform AOL into an online media company. AOL has been making progress building online content – including video. Noteworthy acquisitions – including Huffington Post, TechCrunch and Engadget – have helped AOL gain traction. Additionally, the company has an advertising network for delivering video ads.

AOL still has its bread and butter, dial-up Internet access service. Amazingly, 2.1 million Americans still pay more than $20 per month for this service. That business contributes to one-fifth of AOL’s sales, and is a big contributor to the company’s bottom line. Verizon doesn’t seem to care much about the dial-up business, even though it’s a big part of AOL.

Verizon plans to launch a video service later this year. And apparently they’re viewing AOL’s content and ad serving platform as a way to grow this new business.

In the world of online advertising, AOL isn’t exactly considered to be a leader. Companies like Google (NASDAQ: GOOGL) and Facebook (NASDAQ: FB) are clearly the dominant players.

For Verizon, the $4.4 billion acquisition is a small deal. After all, that amount equals just 2% of Verizon’s $203 billion market capitalization.

The AOL acquisition is a sign that Verizon’s core business faces real challenges. Verizon doesn’t see great growth opportunities within its core business. And so it’s expanding into new areas in an effort to find some growth.

Will Verizon’s video service be a flop? I don’t know. But I’d rather place my money on Google or Apple figuring out how to topple the cable industry.

Beyond the 4.4% dividend, there isn’t much reason to own Verizon stock today.

This article is brought to you courtesy of Ian Wyatt from Wyatt Investment Research.

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