Verizon (NYSE: VZ) has launched a whopping $49 billion bond to pay for Vodafone's stake in Verizon Wireless. Let's take a look at whether or not Verizon investors should be concerned by the amount of debt the company is taking on with the purchase.
Like many carriers, Verizon operates in two parts: wireless and wireline. For some time, Verizon's divisions have been doing well. Wireless revenues constitute 67% of Verizon's entire receipts, sustaining the company's earnings and cash flow momentum. Fortunately, the segment's operating margin has not lagged behind the competition. While Verizon expects 2013 wireless operating margin to reach 32.4%, Sprint (NYSE:S) enjoys a 2.3% operating margin. Sprint's margin operating margin is suffering due to the non-cash charges related to the shutdown of its Nextel platform.
To compete with Verizon, Sprint will introduce a new set of unlimited calling, texting, and data options. Sprint wants customers to lock in plans that promise unlimited data in their contracts. However, Verizon will launch its voice over LTE (VoLTE) service in the first half of 2014. The service will allow voice calls to be made over Verizon's 4G LTE network. Once VoLTE becomes available, Verizon can offer LTE-only devices that don't require many cellular radios, clearing the company for improved operating margin in the future.
VoLTE and AT&T
Verizon is not the only carrier embarking on the VoLTE service. AT&T (NYSE: T) is planning to adopt VoLTE later on in 2013. It is conducting network upgrade testing and will have a LTE-compliant device soon. AT&T has a wide range of technologies compared to Verizon, so its VoLTE network won't accommodate only LTE devices.
With the VoLTE project on course, Verizon is hoping to boost earnings with the replacement of high maintenance portions of its residential copper network with fiber optics. This will provide enhanced services and reduce repair costs. By the end of 2013, Verizon will accomplish 300,000 migrations within the wireline market. The initiative will increase earnings of its wireline operations and enhance Verizon's network.
AWS spectrum migration
Like other carriers, Verizon is keen on strengthening its network. It will launch LTE service on its AWS spectrum during the latter part of the year. The initiative will lead to even stronger customer adoption of its products. A smaller carrier like T-Mobile is building the entire company on the back of network enhancement. Additionally, it will be dropping international roaming charges to over 100 countries and enlisting artistes to promote the new service plan. It will end the year giving LTE-coverage to 205 million people, compared with 300 million for Verizon.
Verizon's smartphone lineup
Additionally, Verizon will continue to enhance its 4G LTE device lineup. It recently introduced the HTC One. Along with the introduction of Nokia Lumia 928 and others, Verizon's smartphone lineup provides room for further improvement in the company's wireless revenues in the next few quarters. Verizon's smartphone lineup might seem like a small player in the business, but in a market with growth potential, the segment could witness increased sales alongside other divisions.
With the VoLTE roll out and network enhancement, investors should not be too concerned about the amount of debt Verizon is taking by buying Vodafone's stake in Verizon Wireless. The expected debts are worrisome, but Verizon has potential for major profits in the years to come. With a history of attractive dividends and a current 4.5% yield to boot, the stock will continue to be profitable in the future.
Mark Girland has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.