Novice Investing - Verizon in Optic Horizon

Date: Monday 01st 2008f December 2008 05:09:49 PM

Verizon in Optic Horizon - 09/28/2006

By: Novice Investing Staff

Spending money is the easy part. Recouping it back is a little bit harder to do. On Wednesday, Verizon announces an ambitious plan to replace half of its old copper telephone network with cable optic to offer customers cable TV and superfast internet connections. The cost? A cool $ 22.9 Billion. The project dubbed "FiOS" will supposedly save $ 4.9 Billion in four years due to reduced maintenance required for fiber network.

On the surface, that looks like a fine project. But it also points out Verizon's weakness and the threat of its existing asset. In 2005, Verizon lists 75.3 Billion of property plant & equipment in its balance sheet. And now, it is spending another $ 22.9 Billion to basically protect its asset. We have also pointed out the depreciation years of various companies. Verizon is not exactly our model company with more than 9 years needed to completely depreciate all its long term assets. With this new initiative and assuming a 10 years depreciation, Verizon would have to depreciate $ 2.3 Billion more each year, which will deflate earnings. For the past two years, Verizon reported $ 7.5 Billion in earnings. Thus, earnings will be cut in one third.

Will the $ 22.9 Billion in spending increases revenue significantly? Our guess is no. It will be offering cable TV and offering superfast internet connection. That is not exactly a breath-taker. It also shows Verizon's weakness in its DSL - Cable war. Both Comcast and Verizon might go the way AOL does. You can see that the former dial-up king is worth no less than a portal offering free service while making money on the side with advertisement.

Don't even mention Verizon's landline subscribers. At this point, it might go towards zero fairly quickly as faster internet connection allows customers to phone via internet. Skype has been offering that kind of service for free for years.

All the concerns above is one of the reason why Verizon shares hardly move over the past few years, despite its 4.30% dividend yield. The same thing applies to another baby bells, namely AT&T (formerly SBC)

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Verizon Comm. Inc. (VZ) or any other securities.

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