Over the last 12 months, Verizon Communications (NYSE:VZ) has spent nearly $17.5 billion on capital expenditures, significantly higher than the $16.6 billion and $16.1 billion it spent over the preceding two years, respectively. While spending 14.1% of its total 12-month revenue on investments might seem like a lot, Verizon is making necessary investments that could shape its future. That said, are these investments in the best interest of shareholders?
What's Verizon investing in?
In Verizon's most recent annual report, it specifically mentioned its 4G LTE network and FiOS services as two key areas of focus for investment, both in the recent past and in 2014. While the company will remain focused on improving its data center, providing support for legacy voice networks, and driving operating efficiencies higher, Verizon's most important and promising areas lie in 4G LTE and FiOS, which are imperative to Verizon's wireless and wireline businesses, respectively.
Improving 67% of Verizon
Last year, 67% of Verizon's total revenue came from its wireless segment, which includes mobile phone and data services. In this segment, Verizon has made key changes and improvements, spending $9.4 billion of its $16.6 billion in capital investment within this segment.
According to Verizon, a substantial portion of wireless investments went toward completing and improving its 4G LTE network, which now covers 97% of the U.S. as the nation's largest network and is reportedly 10 times faster than its older 3G network. At the end of 2013, 69% of Verizon's data traffic was carried on its 4G LTE network, which is expected to increase over the next several years.
The completion of this network puts Verizon in a great position to improve existing services. Verizon recently launched voice-over-LTE, or VoLTE, which improves call quality, allows for high-definition video, and could eventually remove the costs associated with its CDMA voice network. By placing two key services, data and voice, on one network, Verizon can simplify its business and find cost synergies in a VoLTE market that's expected to grow 145% annually over the next three years until it becomes a $17 billion industry.
Verizon is also in the process of replacing older copper wires with fiber-optic cables. Verizon owns tens of thousands of square miles of copper wires, but by replacing these with fiber it can carry more data and greater bandwidth, and transmit digitally rather than analogically. This move should improve 4G LTE speeds, and it also aids the company in its wireline initiatives by driving faster broadband speeds.
Focusing on growth
Speaking of wireline, Verizon spent $6.2 billion last year in this segment, with much of the company's energy focused on product bundles that include broadband Internet access, digital TV, and local and long distance voice services. Verizon calls these services both alone and combined FiOS.
In retrospect, FiOS is a small segment of Verizon's total business. Last year, FiOS accounted for approximately 71% of its $14.7 billion in consumer retail, up from 65% in 2012. However, FiOS is a growth driver, led by fast speed broadband Internet services, with revenue increasing nearly 15% year-over-year.
Not to mention that while the migration from primary and secondary phone lines negatively affects Verizon's wireline business, FiOS' growth serves as a segment that has kept overall revenue in its wireline segment flat year-over-year.
Verizon's strategy includes boosting broadband Internet speeds up to 500 megabits per second, which is about 50 times faster than average broadband. These speeds allow for superfast Internet use and clear, uninterrupted digital TV.
Verizon's investment in its ability to serve 18.6 million households with FiOS services explains much of its capital expenditures in wireline. Google's Fiber service is a competitor to FiOS -- both use fiber networks -- and Goldman Sachs recently estimated that for Google to reach 50 million households, a little less than half of all U.S. homes, it would cost the company up to $70 billion in capital investments.
In other words, Verizon has already built its network for about 18% of all U.S. homes, and in this last year has adopted a build-to-demand approach to minimize costs. With this approach Verizon's FiOS services should occupy the households that it is capable of serving, having a better conversion rate. Given the growth of FiOS services, these appear to be wise investments, especially considering the speed advantage that its services have over most competitors in the broadband space.
With Verizon's 4G LTE network built, and it shifting voice users from CDMA to 4G, the company's future costs should decline in the coming years. Verizon has positioned itself well to reap the benefits of having the nation's largest 4G LTE network, meaning that future costs will likely revolve around improving the speeds and the data strain associated with higher usage. Meanwhile, competitors like AT&T are forced to play catch up in building their 4G LTE network, or they are stuck, as in the case of T-Mobile, paying Verizon for access to its 4G LTE network.
As for wireline and FiOS services, Verizon appears to have a real gem on its hands with broad coverage, but investors should expect costs to remain high as it expands its coverage area and doubles speeds to 1 gigabit per second. That said, these are all necessary investments to improve Verizon's services and grow the businesses that have the greatest upside potential. With the stock trading at less than 10.5 times trailing 12-month earnings, and paying an annual dividend of 4.4%, Verizon's approach will likely yield large returns long-term and prove to be a wise investment opportunity.
Brian Nichols owns shares of Verizon Communications. The Motley Fool recommends Google (A shares) and Google (C shares). The Motley Fool owns shares of Google (A shares) and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.