This paper analyzes Verizon Communications, Inc.'s fiscal year 2010 financial performance, focusing on the company's two business segments — Domestic Wireless and Wireline. It examines cash flow from operating, investing, and financing activities, including capital expenditures for 4G LTE network expansion, debt repayment, and acquisition activity. The paper also reviews Verizon's dividend history and the Board's dividend policy. It concludes with an investment recommendation, arguing that Verizon's market stability, diversified infrastructure, attractive dividend yield, and modest revenue growth make it a sound choice for the average investor.
Verizon Communications, Inc. (NYSE: VZ) has two business segments — Domestic Wireless (operated as Verizon Wireless) and Wireline. These business segments are operated and managed as strategic business units and organized by products and services. The company uses the so-called "Anglo-American model," or "the unitary system" (Mallin, 2011), which employs a single-tiered Board of Directors comprised of a mixture of executives from the company and non-executive directors, all elected by shareholders (Bowen, 2008). Verizon has fourteen board members, including the current CEO. Each business segment is operated separately, but the cash flow and dividend information described in the 2010 annual report is not split out by business unit. Thus, the results presented below reflect both the Verizon Wireless and Wireline segments combined.
Cash and cash equivalents at December 31, 2010 totaled $6.7 billion, a $4.7 billion increase compared to cash and cash equivalents at December 31, 2009. The sources of cash flow from operating, investing, and financing activities. The net cash generated from operations is used to fund network expansion and modernization, repay external financing, pay dividends, repurchase Verizon common stock from time to time, and invest in new businesses. Investing activities include capital expenditures to grow the networks, dispositions of businesses, and acquisitions, which are detailed below. Debt or equity financing is used to fund additional development activities or to maintain a capital structure that ensures the company's financial flexibility; however, in 2010 this was reduced significantly as there were relatively few large acquisitions.
The following table reconciles net cash provided by operating activities to free cash flow:
Table 1: Cash Flow Position
Cash from operating activities during 2010 was used to invest in the capacity of the wireless EV-DO networks and fund the build-out of the 4G LTE network. This prompted an increase in capital expenditures at Domestic Wireless of nearly $1.3 billion compared to 2009. As a whole, the company's overall capital expenditures decreased due to a reduction in Wireline spending related to FiOS. Additionally, there was an investment of $1.4 billion in acquisitions of licenses, investments, and businesses to further the company's growth. One such acquisition was completed on August 23, 2010, when Verizon Wireless acquired the net assets and related customers of six operating markets in Louisiana and Mississippi from AT&T Inc. for cash consideration of $0.2 billion.
Some cash was also applied to interest paid on debt, which decreased in 2010. This included Verizon Wireless exercising its right to redeem the outstanding $1.0 billion of aggregate floating rate notes due June 2011, at a redemption price of 100% of the principal amount plus accrued and unpaid interest through the date of redemption on June 28, 2010. In a separate transaction, Verizon Wireless repaid the remaining $4.0 billion of borrowings outstanding under a $4.4 billion Three-Year Term Loan Facility Agreement, and that facility was subsequently cancelled.
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