U.S. markets closed
  • S&P 500

    3,841.94
    +73.47 (+1.95%)
     
  • Dow 30

    31,496.30
    +572.20 (+1.85%)
     
  • Nasdaq

    12,920.15
    +196.65 (+1.55%)
     
  • Russell 2000

    2,192.21
    +45.29 (+2.11%)
     
  • Crude Oil

    66.28
    +0.19 (+0.29%)
     
  • Gold

    1,698.20
    -0.30 (-0.02%)
     
  • Silver

    25.30
    +0.01 (+0.03%)
     
  • EUR/USD

    1.1923
    -0.0056 (-0.47%)
     
  • 10-Yr Bond

    1.5540
    +0.0040 (+0.26%)
     
  • GBP/USD

    1.3840
    -0.0054 (-0.39%)
     
  • USD/JPY

    108.3170
    +0.3410 (+0.32%)
     
  • BTC-USD

    50,150.45
    +1,637.43 (+3.38%)
     
  • CMC Crypto 200

    982.93
    +39.75 (+4.21%)
     
  • FTSE 100

    6,630.52
    -20.36 (-0.31%)
     
  • Nikkei 225

    28,864.32
    -65.78 (-0.23%)
     

Verizon: A Mature Company Still Creating Value

  • Oops!
    Something went wrong.
    Please try again later.
GuruFocus.com
·2 min read
  • Oops!
    Something went wrong.
    Please try again later.

- By Panos Mourdoukoutas

Some may say that Verizon Communications Inc.(VZ) is a subpar investment because it requires a ton of capital in order to remain relevent. However, in my view, this is a mature company that is still creating value for its stockholders.

It is a mature company because it is well established in its market, where it offers communications, information and entertainment products and services to consumers, businesses and governmental entities.


It creates value because it has maintained a positive economic profit over the last decade. Currently, Verizon's economic profit, as measured by the difference between return on invested capital (ROIC) and weighted average cost of capital (WACC), stands at 4.63%, which is more than three times higher than that of its peer AT&T Inc. (T):

Company

ROIC

WACC

ROIC-WACC (Economic profit)

Verizon

7.96

3.33%

4.63%

AT&T

6.66%

5.33%

1.33%



Verizon also beats AT&T in most critical financial performance metrics, as listed below:

Company

Verizon

AT&T

Three-year Revenue Growth (%)

0.2

-2.7

Three-year Ebitda Growth (%)

1.6

-14.2

Current Operating Margin (%)

22.45

14.65

Annual Dividend (%)

4.45

7.12

Market Price

$56.45

$29.00

Intrinsic Value

$56.07

$29.95



Economic profit is a measure of how effectively a company allocates the capital it raises in to generate profits. It is also often used as a measure of a company's competitive advantage. One of the reasons why Verizon is outperforming AT&T is because it has steered away from costly acquisitions.

Value investors also seem to have taken notice of the stock recently, including Warren Buffett (Trades, Portfolio), who added Verizon to his portfolio last week.

Like its competitors, Verizon's assets allow the company to bundle together different product offerings, a strategy that supports and re-enforces its competitive edge. Bundling of Internet services with mobile services, for instance, creates customer lock-in relationships - arrangements that make it costly for customers to switch to competing products.

Bundling further allows the company to achieve economies of scale, i.e. the cost benefits associated with serving a more extensive customer base with the same company assets. Average cost declines as more customers join its Internet and Mobile network.

The bottom line: Verizon is a textbook case of an oligopolistic firm that has managed to preserve economic profit, making it a more attractive value buy than competitors.

Disclosure: I own shares of Verizon Communications

Read more here:



Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.

This article first appeared on GuruFocus.