The bell has rung and Verizon (NYSE:VZ) is down for the count -- or at least down for the day. The country's largest phone company called up investors this morning to say that 2003 results would ring short of expectations, putting the blame on weak demand, costs associated with labor negotiations, and increased regulation.
Earnings per share of $2.56 to $2.60 are the new mantra for 2003, cut down from the previous party line of $2.70 to $2.80. The company did not touch revenue guidance, which holds steady at $67.5 billion, flat with last year. You might ask, why a drop in earnings while revenue holds steady?
Partly because Verizon is seeing increased demand for wireless services, where it now expects to add 4.5 million subscribers in 2003, topping earlier estimates of 4 million. However, the local phone business suffers when consumers switch to wireless packages and, in some cases, ditch the landline. The end result is lower overall profitability for the phone companies that need to maintain expensive land networks.
To counter a hit on margins, Verizon is on track to cut $1 billion from 2003 capital expenditures, to about $12 billion, and annual labor costs will decline significantly following a new five-year contract, signed last month, with unions representing 35% of Verizon's workforce.
The company, which is one of the most widely held stocks in America, needs to save all the money it can. Verizon labors under net debt of approximately $48 billion, and while it created about $10 billion in free cash flow last year, it paid out 40% of that in a dividend. Today, the stock yields 4.4%, in line with most peers.
Speaking of peers, those guys took it on the chin this morning, too, because many analysts believe weak demand at Verizon, especially in local services, will likely prove the case industrywide. SBC Communications (NYSE:SBC), BellSouth (NYSE:BLS), and even long-distance giant AT&T (NYSE:T) were all crunched some.
This industry's giants struggle to show net growth, and that may not change anytime soon, hence the higher dividend yields.
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