Should I Buy Verizon? 3 Pros, 3 Cons - Investorplace.com

The telecom world is like the Old West: People keep riding into town to tell the local sheriff that they plan on taking it over.

The growth of wireless phones has been astonishing, from Apple‘s (NASDAQ:AAPL) iPhone lineup to Google‘s (NASDAQ:GOOG) Android model. And with primarily three players all vying for a piece of the pie, it’s hard to figure out which phone and service to use, not to mention which stock to buy as an investor.

AT&T (NYSE:T), Sprint (NYSE:S) and Verizon (NYSE:VZ) are the primary sheriffs in their own little towns, and they’re battling it out to see who’s left standing when the smoke clears down the road. While it’s highly unlikely, of course, that any of these three will go away, one is bound to come out on top of the others.

The question is, which one? Let’s take a look at three pros and three cons for Verizon:

Pros

4G LTE Network. This might be Verizon’s biggest asset. The popular network is available in nearly 265 more markets than AT&T’s 4G offering and should be available with the highly-anticipated iPhone 5, which is set to be released in September. Throw in the fact that Verizon has been gaining on the iPhone-sales leader for the past three quarters even when its iPhone 4 was only offered with one less G, and things look pretty good for the provider.

High-Speed Internet Access. But Verizon isn’t just phones â€" it’s also Internet. Several years ago I jumped ship from rival-provider Comcast (NASDAQ:CMCSA) primarily due to poor service and I’m glad I did. I’m also clearly not alone. Verizon continued to increase sales penetration, adding 134,000 Fios Internet and 120,000 new Fios TV subscribers in Q2. FiOS generated 65% of the company’s revenue and around 70% of FiOS consumer customers have purchased a “triple play” of phone, Internet and TV services. Solid.

Dividend Growth: Telecom stocks are know for solid dividend and Verizon is no exception. It payouts have increased from 46 cents per share per quarter in 2009 to 50 cents per share â€" a very nice 8% growth â€" making for a yield of 4.7%. That’s a nice reward for investors, and VZ has nearly $11 billion in cash on hand, so the dividend growth should continue.

Cons

Competition. Like I said, other carriers sure won’t be going away. AT&T, once again, is the other big name in the business, but it doesn’t end there. Verizon switched to the “Share Everything” plan, catering to customers with smartphones and multiple devices, and many customers were up-in-arms about the change. Sprint, on the other hand, never stopped offering unlimited data, while T-Mobile recently re-instated its full-speed unlimited option in response to consumer demand. And if that’s really what customers want, they won’t find it at this provider.

Market Saturation. There were roughly 5 billion mobile subscribers in the U.S. last year, representing about 9 out of every 10 people. That means, though, that subscription growth will have to slow â€" and already has started to. The market is not only finite, but could be close to being saturated. When it finally is, price pressure is likely to occur, and”stealing” market share will mean cutting prices and thus cutting profits.

Valuation. Verizon is a slow-growth company, yet is currently trading at a P/E of 43. And while it has pulled back from its year-highs, it still seems overbought. AT&T’s ratio is even slightly higher, but looking discounted compared to your also-overbought competitor is hardly a ringing endorsement.

The Bottom Line

Verizon’s has a lot going for it, offering up solid services and a sweet dividend. And while dividend growth is a plus, there is one red flag: Verizon pays out more in dividends than it makes in net income.The company made $2.4 billion in 2011 and generated $2.6 billion in free cashflow, but paid out $5.5 billion in dividends.

Still, that $11 billion in cash that I mentioned earlier is a nice cushion, and the company also has good growth prospects and a solid reputation for service and reliability.

All-in-all, the pros outweigh the cons for this stock, making Verizon a solid long-term stock for any investor’s portfolio.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he is long VZ.