Is Verizon Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Verizon (VZ 0.90%) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Verizon's story, and we'll be grading the quality of that story in several ways:

• Growth: Are profits, margins, and free cash flow all increasing?
• Valuation: Is share price growing in line with earnings per share?
• Opportunities: Is return on equity increasing while debt to equity declines?
• Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Verizon's key statistics:

VZ Total Return Price data by YCharts

Source: YCharts. * Period begins at end of Q1 2010.

VZ Return on Equity data by YCharts

Source: YCharts. * Period begins at end of Q1 2010.

How we got here and where we're going
Things seem to be pretty ugly for Verizon today. The broadband and telecommunication services provider earns only one out of nine possible passing grades, and even that lone pass was granted more on the fact that free cash flow is suffering a less ugly decline than net income. Verizon's trailing 12-month free cash flow may actually be over 11 times higher than its net income, but the company's still paying out a worryingly high amount of that cash flow as dividends. Despite several weaknesses, Verizon's shares have been pushed steadily higher for the past three years. Can Verizon keep rewarding shareholders this well in the future? Let's dig a little deeper to find out.

Verizon recently finished the roll-out of its 4G LTE network, which now covers 500 markets, and more than 99% of Verizon's 3G service area. AT&T (T 1.10%), which is still behind Verizon in terms of coverage, recently added another 35 LTE markets to reach a total of 326 markets, and now covers 292 million people on its 4G network. However, AT&T also includes HSPA+ in its 4G marketing claims, and actual connection speeds may not justify that assertion under typical 4G definitions. Smaller carriers Sprint and T-Mobile are still far behind in the LTE race. Verizon has enough financial strength to continue to lead telecommunications companies into the next generation of service.

Verizon is also promising to deploy voice-over-LTE, or VoLTE, which has been a long time coming and has seen numerous delays. The company had initially planned commercial deployment of VoLTE in 2012, but subsequently pushed it back to 2013. However, the company has recently announced that VoLTE wouldn't launch until early 2014. If its history of delays is any indication, investors may not want to hold their breath for a 2014 roll-out, either.

Verizon's potential buyout of Vodafone's (VOD 0.72%) stake in the companies' joint wireless venture could make it difficult to accurately assess Verizon's long-term outlook. Verizon has long been trying to resolve underlying control issues with the British telecom powerhouse, which owns a 45% stake in Verizon Wireless. There have even been talks of Verizon buying Vodafone's stake outright in the world's largest leveraged buyout. This would leapfrog Verizon over many competitors in the global telecom race, but at the price of adding a massive debt overhang to its already hefty debt commitments.

The U.S. mobile market appears to have peaked, as networks added only about 200,000 postpaid subscribers, and about 1 million no-contract customers in the first quarter. The market is effectively supersaturated with more than 300 million mobile subscriptions. Growing at this point means stealing market share from somebody else, but that doesn't mean the end of stronger business in the sector, as service revenues increased by 14% year over year. Verizon and AT&T account for 70% of mobile sales, but only 66% of subscribers, so there is at least some pricing power left in having a leadership position.

Putting the pieces together
Today, Verizon has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.