Capital Expenditures in the Telecommunications Sector
Verizon is a good example of a telecom company that spends the majority of its capital by expanding its wireless networks and improving or replacing copper wire with fiber optic cable. Infrastructure. As of Sept. 30, Verizon had total cash of well over $57 billion and trailing twelve month operating cash flow of more than $35 billion.
The company pays a generous dividend (more than 4%) but knows how to wisely allocate capital to grow its most lucrative business segments. That's the reason it spent $130 billion ($58.9 billion in cash, $60.2 billion in stock and about $11 billion in smaller transactions) to buy Vodafone's (VOD) 45% stake in Verizon Wireless. A fine and welcome example of a company focusing its spending on the most lucrative enterprises.
To finance the deal, Verizon raised $49 billion in a bond offering. Verizon anticipates that the transaction to buy Vodafone's Verizon Wireless holding will close in the first quarter of 2014 and will be 10% accretive to earnings per share. That may be baked into the current share price of around $50.60, so if shares were to correct just 5%, we may be able to accumulate shares closer to $48 a share, giving shareholders a dividend yield-to-cost of 4.42%.
Other companies are sitting on piles of cash, especially in the energy sector. No matter what sector, it's usually prudent to buy companies that are expected to experience revenue growth as a direct result of smart, accretive investments in the most promising areas of their own industries and businesses. Chevron and Verizon are those kinds of companies, and the future revenue and earnings growth for both will substantiate the investment premise of this article.
At the time of publication, the author is long shares of CVX, VZ and VOD.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.