Verizon Communications (VZ – Free Verizon Stock Report), the telecommunications giant and Dow-30 component, reported first-quarter earnings of $1.17 a share, seven cents above our estimate and 23% higher than the year-ago result, on a 6.6% top-line improvement. Nevertheless, investors do not seem overly enthused, with Verizon stock up modestly on the news.
Truth be told, this impressive performance was better than we had expected. Earlier this year, we had noted that the company's fortunes had been tempered of late by the combined effects of the April, 2016 sale of its high-margined wireline operations in California, Florida, and Texas to Frontier Communications, the ongoing shift of wireless customers to device payment plans, and the ramping up of its new business model. However, the tides definitely seem to be turning. Indeed, during the March quarter, VZ Wireless reported a 4.7% increase in first-quarter revenues, the company's second year-over-year wireless revenue growth in two years. The percentage of phone activations on device payment plans was 81% in the March period, compared to 72% for the same period last year. This has helped ease service revenue declines, which seemed to be improving toward the end of the first quarter. VZ Wireless added 260,000 retail postpaid net additions during the March period, bringing Verizon's total number of retail connections to 116.2 million, a 2.0% year-over-year increase. However, the market is definitely competitive, as Verizon's customer count was relatively flat on a sequential basis.
Separately, total revenues for the Wireline division were down 1.8% year over year, despite total FiOS revenues growing 1.9% during the quarter, thanks to growing demand for high-quality broadband service. It is important to note that Verizon added a net 66,000 FiOS Internet connections, yet lost 22,000 FiOS Video connections during the first three months of the year, due to a continued shift away from traditional linear video bundles.
The outlook for Verizon's performance in 2018 has definitely improved over the last few months, thanks, in large part, to the Tax Cuts and Jobs Act. Notably, the expected savings from tax reform is expected to generate a net $3.5 billion to $4.0 billion uplift in cash from operations in 2018. Management expects this to result in a 55 to 65 cent increase in 2018 share net, net of impacts from employees and Verizon Foundation initiatives. Finally, the effective tax rate for this year is projected to be in the range of 24% to 26%. Separately, last year, Verizon announced a goal to achieve $10 billion in cumulative cash savings over the next four years. The company's business excellence initiative, which includes implementing zero-based budgeting, yielded positive results in the March quarter, with VZ realizing about $200 million of savings thus far. As a result, we have upped our 2018 earnings estimate by a dime, to $4.60 a share.
On a final note, this blue chip stock remains a good choice for conservative investors, due to its well above-average dividend yield, Highest (1) Safety rank, and alluring 3- to 5-year appreciation potential.
About The Company: Verizon Communications was created by the merger of Bell Atlantic and GTE in June of 2000. It is a diversified telecom company with a network that covers a population of about 298 million and provides service to nearly 98.2 million. In the decade or so, it has acquired MCI (1/06), Alltel (1/09) and Yahoo! (6/17). The company is also the largest provider of print and on-line directory information. Has a wireline presence in 28 states & Washington, D.C. and a wireless presence in every U.S. state & D.C., as well as operations in 19 countries.
— Kenneth A. Nugent
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
