One Of Warren Buffett's Top High Yield Dividend Stocks: Verizon

Verizon (VZ) is one of Warren Buffett’s top high-yield dividend stocks. The company has paid dividends for more than 30 years and has increased its dividend for over 10 straight years.

Paying uninterrupted dividends for as long as Verizon has is usually the sign of a durable company.

Verizon is a blue-chip dividend stock that enjoys high barriers to entry in its core markets and has made a number of strategic investments to prepare itself for the technological changes impacting the communications industry.

With a high dividend yield in excess of 4% and a very safe dividend payment, Verizon is a company I like in our Conservative Retirees dividend portfolio.

Business Overview

Verizon is the largest wireless service provider in the United States. The company’s 4G LTE network is available to over 98% of the country’s population.

Wireless operations generated close to 70% of Verizon’s revenue last year and accounted for over 90% of the company’s operating income.

Wireline operations accounted for just less than 30% of the company’s revenue in 2015 but only generated about 7% of Verizon’s operating income. This segment includes broadband video and data and traditional voice services.

Overall, Verizon maintains more than 112 million wireless retail connections, 7 million Fios internet subscribers, and 5.8 million Fios video subscribers.

Business Analysis

Verizon’s key to success has been delivering reliable wireless and wireline services over the best communications network in the country.

During 2015, Verizon invested roughly $28 billion in capital and spectrum licenses to increase the future capacity of its wireless network and enhance its fiber network.

The company’s investments have kept it at the top of Root Metrics’ rankings of wireless reliability, speed, and network performance for each of the last five years. The chart below shows overall performance metrics for the big four carriers:

Verizon VZ Dividend

Source: Root Metrics

Verizon’s 4G LTE network is available to over 98% of the U.S. population and covers roughly 312 million people.

With about 90% of wireless data traffic now riding on the 4G LTE network, Verizon has already begun work to get its network ready for 5G wireless technology.

The company expects to conduct trials of 5G during 2016 and begin commercial deployment thereafter.

Verizon has historically enjoyed a two-year advantage on its competitors when moving to the next generation network architecture, and the company seems to be doing everything it can to make sure this remains the case with 5G.

Further helping its competitive positioning, Verizon maintains one of the 25 most valuable brands in the world. Consumers and businesses trust Verizon’s network reliability and superior performance.

As long as Verizon continues to invest in its leading network coverage and architecture, the company should continue maintaining a massive base of customers.

Disrupting Verizon’s base of customers would be almost impossible barring a revolutionary change in network technologies.

Growth in the number of new wireless subscribers has slowed considerably with smartphone adoption now being widespread.

With new customer growth hard to come by, the industry has consolidated to become more productive and expand coverage. Verizon, AT&T (T), T-Mobile (TMUS), and Sprint (S) generate almost all of the industry’s revenue today.

Verizon’s large subscriber base provides it with the cash flow needed to support and enhance its existing wireless network. Potential new entrants lack the subscribers needed to fund a nationwide wireless network and acquire spectrum licenses, effectively keeping them locked out of the market.Trying to win subscribers over from Verizon would be extremely costly and impractical. It’s a lot easier to maintain an existing large base of subscribers in a  mature market than it is to build a new base from scratch.

While competition between the four major carriers is intense, Verizon’s scale and leading market position has enabled its wireless segment to deliver excellent EBITDA margins in excess of 40% and predictable earnings.

Simply put, new entrants lack the capital, spectrum, and subscriber base to effectively compete with any of the big four carriers in the U.S.

In addition to the industry’s high barriers to entry, the wireless communications market is also appealing because its services are non-discretionary in nature. For example, Verizon’s churn rate (i.e. the percentage of customers who leave) in its wireless business was about 1% last year. The majority of the company’s revenue is also recurring because consumers and businesses have a continuous need to communicate and use data.

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Disclosure: At the time of this writing, the author was long VZ.

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