Telecoms are supposed to be boring stocks — the kind of stuff that “widows and orphans” buy. Providing phone service isn’t exactly a sexy business. And even offering high-tech mobile/cellular data services is pretty much commoditized these days. Telecoms are boring; it’s as simple as that.
But boring isn’t necessarily bad. Telecom’s large moats, steady demand, and cash flows translate into high and stable dividends. That helps explains why widows — and retirees alike — love them.
So when leading telecom Verizon (VZ ) made some very un-telecom-like moves recently, investors and traders certainly took notice. And you should be taking notice as well. VZ is no longer just a boring telecom play. It’s now positioning itself to be one of the biggest firms in tech — one that will continue to deliver in terms of growth and furthering its already large dividend.
Verizon Looks for Non-Traditional Growth
Verizon is America’s largest wireless service provider with nearly 112 million wireless subscribers. The firm also operates wireline, cable, and internet connection assets. However, its wireless/cellular business is the piece that is really driving the show. Those wireless operations provided roughly 70% of VZ’s revenue last year and accounted for over 90% of the telecom’s operating income.
The problem is, when you’re that big, it’s hard to grow in a meaningful manner. After all, this is a telecom we are talking about.
Sure, VZ has been successful at upselling customers to higher data plans and bundling internet/phone and cable together. But with 112 million wireless subscribers already under its umbrella, it’s pretty hard to move the needle.
With that in mind, Verizon needed to think big.
Rather than heading down a more traditional telecom path — such as rival AT&T (T ) did when it purchased DirecTV — Verizon went straight for the throat of some of the biggest names in tech.
In recent months, VZ has added both former tech darlings AOL and Yahoo! (YHOO ) to its family of businesses via big-time buyouts. Also on the high-tech side, Verizon purchased Telogis and Fleetmatics Group (FLTX). With these four buyouts, VZ has instantly transitioned itself into a major technology player.
At first blush, buying two of the web’s old — and perhaps dying — leaders may not make a ton of sense for VZ’s bottom line. But indeed, it’ll turn out to be something great. The reason is one word: advertising.
The buyout of AOL gave Verizon millions of active users, hit web properties, and some very important online advertising technology. Yahoo provided just over a billion active global users, a powerful search and analytics platform, and a huge dataset on those users’ activities.
When you combine all of that with Verizon’s own data surrounding its customers’ mobile behaviors, you’re now looking at being able to cross-sell and co-market across a very rich mobile platform. Verizon will now be able to take on tech players like Google (GOOG ) and Facebook (FB ) in the world of online advertising. And it might actually do better in the world of mobile, since it’s already the mobile kingpin.
As for Telogis and Fleetmatics, VZ is now positioning itself as a leader in fleet and mobile workforce management solutions. The connected vehicle market is rapidly growing and the two buys allow it to cross-sell SaaS and fleet management solutions over its huge wireless network. The solutions themselves allow for additional revenues, but the added fees for using the wireless data network could be the real money maker for Verizon. Also, the millions of data points collected from being connected won’t hurt either — especially when VZ plugs them into its newly acquired advertising software.
Driving Dividends Into The Future
When all of these deals finally start moving together, Verizon is going to be sitting pretty.
Not only will it be charging customers for access to its wireless network, but it will also be charging advertisers for access to its customers — both on its cellular plans and its internet properties/services. Think of it this way, imagine if both Facebook and Google were able to collect a fee from you every time you checked your Gmail account or logged into your profile. That’s basically what Verizon is doing. It’ll make money coming and going.
That’s awesome news for the firm’s bottom line and cash flows.
Already, VZ is a dividend stalwart. The telecom has paid steady dividends for nearly 50 quarters and has raised its payout 10 times over this period. With advertising now complementing the main wireless businesses, VZ’s current yield of 4.2% should keep on rising into the future.
The Bottom Line
Verizon is quickly shedding the skin of being a boring telecom stock. And it’s now as high-tech as they come. By switching gears into online and mobile advertising, VZ is now joining the ranks of tech royalty. And along with that title comes all the riches. Investors should take notice.