Berkshire Hathaway buys a new stake in Verizon Communications

Berkshire Hathaway and Verizon Communications

Warren Buffett’s Berkshire Hathaway started a new position in Verizon Communications (VZ) and upped its holdings in Liberty Global Plc-Series C (LBTYK), Wal-Mart Stores Inc. (WMT), International Business Machines Corp. (IBM), and DaVita Healthcare Partners (DVA). The positions the fund trimmed included Phillips 66 (PSX) and General Motors Co. (GM).

Berkshire Hathaway took a new position in Verizon Communications (VZ) last quarter. The position accounts for 2.04% of the fund’s portfolio. Hedge funds owned by John Paulson and Dan Loeb also took positions in Verizon last quarter.

Verizon is one of the world’s leading providers of voice, data, and video services and solutions on wireless and wireline networks that are designed to meet customers’ demand for mobility, reliable network connectivity, security, and control. Its wireless business, operating as Verizon Wireless, provides voice and data services and equipment sales across the United States. Verizon’s wireline business provides consumer, business, and government customers with communications products and services, including broadband data and video services, network access, voice, long distance, and other communications products and services, and also owns and operates one of the most expansive end-to-end global Internet protocol (IP) networks.

The telecom sector is undergoing a consolidation, with Sprint (S) owner SoftBank (SFTBF) in talks to acquire T-Mobile (TMUS) and AT&T announcing plans to buy leading U.S. satellite operator DirecTV. However, Verizon CEO Lowell McAdam recently ended speculation by saying the company wasn’t interested in acquiring satellite operator Dish Network.

The company is currently focusing on the higher-margin and growing areas of its business such as wireless data, wireline data, and strategic services, including cloud computing services. The company organizes its service and product offerings by the primary customers targeted by mass markets, global enterprise, and global wholesale. Verizon also recently signed a “paid peering” deal with Netflix (NFLX) under which the latter will pay Verizon for improved streaming video service to customers.

In February, Verizon Communications completed the acquisition of Vodafone’s 45% indirect interest in Verizon Wireless in a transaction valued at approximately $130 billion. The consideration paid was primarily comprised of cash of approximately $58.89 billion and Verizon common stock with a value of approximately $61.3 billion. Management said, “Acquiring Vodafone’s stake in Verizon Wireless provides us with opportunities for greater financial flexibility, enhanced operational efficiency and innovations that will benefit customers. We are confident it will fuel further growth in our business.” Founded in 2000 as a joint venture of Verizon and Vodafone, Verizon Wireless reported $81.0 billion in operating revenues in 2013. Plus, Verizon sold its 23% interest in Vodafone Italy for $3.5 billion, providing Vodafone with full ownership of Vodafone Italy.

Verizon earnings driven by FiOS services

Verizon’s 1Q 2014 earnings came below analyst estimates. On an adjusted basis (non-GAAP), Verizon reported a 23.5% increase in EPS to $0.84 in first-quarter 2014, compared to $0.68 per share in first-quarter 2013. First-quarter 2014 results included an after-tax gain of approximately $1.9 billion related to the sale of Verizon’s minority interest in Vodafone Italy, and charges of $575 million related to debt redemption and $260 million in interest and financing costs related to the wireless transaction. Driven by wireless and FiOS services, total operating revenues in first-quarter 2014 were $30.8 billion, a 4.8% increase compared to first-quarter 2013 and the company’s highest quarterly growth rate in the past five quarters. FiOS, which is Verizon’s high-speed Internet data product, represented approximately 74% of consumer retail revenue in 1Q 2014.

In January, Verizon acquired Intel Media, the digital TV division of the chip maker Intel, to accelerate the availability of next-generation video services, both integrated with Verizon’s FiOS fiber-optic networks and delivered “over the top” to any device. The release said Intel’s OnCue Cloud TV platform “will help Verizon bring next-generation video services to audiences who increasingly expect to view content when, where and how they want it.” News reports note that Verizon is looking to set up an Internet-based TV service and is seeking content partnerships.

Wireless revenue increases but wireline declines

Wireless total revenues were $20.9 billion in first-quarter 2014, up 6.9% year-over-year, primarily driven by higher retail postpaid service revenue as well as the continued increase in penetration of 4G LTE smartphones and tablets through Verizon’s More Everything plans. Wireline business revenues declined 0.4% as a result of a decline in core customer premise equipment revenues and traditional voice revenues. Verizon noted that its Enterprise customers continue to focus more on improving their cost structure as opposed to investing for growth, which is creating revenue pressure for the company. To compensate for the shrinking market for traditional voice service, Verizon said it’s continuing to build its Wireline segment around data, video, and advanced business services—where demand for reliable high-speed connections is growing.

Verizon expects consolidated top-line growth of 4% and adjusted consolidated EBITDA margin expansion in 2014, with positive contributions to profitable growth from both wireless and wireline.

Verizon has a 4.31% dividend yield

The company is also creating shareholder value and made $5.9 billion in cash dividend payments in 2013. It declared a quarterly dividend of $0.53, representing a yield of 4.31%. Verizon’s board also authorized a buyback of up to 100 million shares of its common stock. Under the previous program, which terminated on February 28, 2014, Verizon purchased 3.5 million shares. Verizon’s free cash flow totaled $3.0 billion in first-quarter 2014, compared to $3.9 billion in first-quarter 2013. With full ownership of Verizon Wireless, Verizon retains 100% rather than 55% of the Verizon Wireless free cash flow.