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Is Verizon’s Pullback A Chance To Buy?

There are many attractive qualities to Verizon as a stock, a high yield of 4.41%, a proven business model and a relatively low P/E of 14 to the market’s 25. The income statement also tells a healthy story. The third quarter of 2016 boasted gross margins of nearly 60%, with operating margins hovering around 20%. The operating section of the cash flow statement also makes a good case for strength with Net Operating CF of $4.8 billion on $30.9 billion in revenue. The company appears to be a healthy operator, but the picture begins to fall apart in the balance sheet.

Verizon is carrying an extremely heavy burden of debt, $103,000,000,000. Every quarter Verizon pays out slightly over $1,000,000,000 in interest expense. The debt to equity ratio of 6.7 is significantly higher than Comcast’s at 0.38. It is understandable that a telecom provider would need to raise debt in order to afford the infrastructure necessary to operate, however, when similar companies are far leaner it raises a warning flag.

Verizon seems to have a spending problem that is not seen just by looking at operating income. The large expenditures are seen when we take a look at capital expenditures, located under cash flows from investing. Cap Ex has averaged nearly $16 billion every year. Again, telecom companies do require above average cap ex. because of the infrastructure needed, however Verizon seems to be a bit too excessive in their investment. The huge expenses are one of the major contributors to their 3 negative net cash flow years from 2012 to 2015.


All of the above factors do not even take into consideration the significant headwinds facing the telecom industry from chord cutters. If one is still interested in making an investment in the industry, it would be best to look for a company with a leaner balance sheet than Verizon.

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