Things Look Less Dim for Verizon Communications After Acquisition

On Monday, communications Verizon Communications VZ announced it will acquire pre-paid wireless company Tracfone for $3.125 billion in cash and $3.125 billion in common stock. The agreement also includes up to an additional $650 million in future cash consideration related to the achievement of certain goals.

Tracfone's network includes over 90,000 retail locations all over the globe, and this move gives Verizon access to Tracfone's 21 million subscribers. The deal could jumpstart a company that has lagged the broader market this year. 

Shares of the largest U.S. cell phone carrier did gain 2.48% in the past month, but its core business was severely hit by the pandemic. Moreover, COVID-19 only further amplified slower sales of smartphones and intense competition from rival carriers that the company was already struggling with last year.

Alleviating Concerns

There is some concern about Verizon's dividend yield, which has been trapped at just over 4% for quite some time now and is lower than its nearest rival AT&T's T yield of about 7%. But despite market challenges, there is plenty of free cash flow to cushion the blow. Unlike top rival AT&T, Verizon isn't trying to digest a massive media business.

More Than Earnings Growth

Verizon Communications has grown both its profit and its revenue over the last few years. But there is more to the company than earnings growth. Last week, its board raised the quarterly dividend from $0.6275  from $0.615 cents, a 2% increase and more importantly the fourtheenth consecutive year of dividend increases. Moreover, Amazon.com AMZN and Verizon are set to resume discussions to invest more than $4 billion for a stake in India's Vodafone Idea Ltd. With 5G, Verizon's expansion into connected cars, Internet of Things devices, and ongoing fiber upgrades could easily be the source of fresh growth next year when the world hopefully leaves the pandemic behind.

The 5G Opportunity

The ultra-fast connectivity and massive capacity of 5G are believed to have an important role in our future. It is expected to contribute to manufacturing automation, cloud gaming, autonomous vehicles, drones, and remote health care services, among many others. Verizon has been investing heavily to support traffic growth across its networks while it continues to deploy more fiber and additional cell sites to expand its 5G rollout nationwide. The company has already launched a 5G mobility service as well as 5G home internet in some of the targeted 60 markets. It was also the winner in the U.S. government's latest auction for spectrum useful for 5G services, as the Federal Communications Commission (FCC) announced on September 2. Verizon was the most successful bidder as it devoted $1.9 billion to captivate the 5G spectrum.  The company has ambitions to become a top mobile services provider in this space. This is ideal for devices using high-bandwidth services like streaming video. Such uses have seen a rise in demand dictated by the stay-in-place measures arising from the coronavirus pandemic. Winning a swath of spectrum will also bring Verizon closer to rival T-Mobile US TMUS, which dramatically increased its licensed holdings with the absorption of Sprint and its assets.

A Less Dim 2021?

Adam Koeppe, Verizon's senior vice president for technology strategy, architecture and planning recently stated that Verizon's move to virtualized infrastructure is ongoing. This specific transaction is aligned with what Verizon does best, provide reliable wireless services while offering a top quality customer experience. Hans Vestberg, Chairman and CEO of Verizon, emphasized that the company is pursuing this important strategic acquisition from a position of strength which is reflected in its strong and prudent financial profile. So, if there's any consolation for this unprecedented year, it seems that 2021 will indeed be less dim.

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