Wireless boom a clear boost for Verizon

Taking Stock

Your Money

May 30, 2004|By ANDREW LECKEY

I OWN shares of Verizon Communications Inc., and I'm disappointed with how it has performed. What is your view of this stock?

- G.T., via the Internet

The wireless boom is a big plus for the nation's largest telephone company, whose frequent commercials pose the question: "Can you hear me now?"

Its wireless subscriber base rose 17 percent in its most recent quarter as it added 1.4 million customers. Verizon Wireless, its 55 percent-owned partnership with Vodafone, is the nation's largest wireless company.

High-growth businesses such as data, wireless, long-distance and DSL Internet now account for more than half of Verizon sales. It continues to be a giant in local-phone service, a business in general decline as many customers switch to wireless.

This company that is the product of the Bell Atlantic-GTE merger also publishes telephone directories.

In a significant changing of the guard, Verizon replaced AT&T this spring on the Dow Jones industrial average of 30 stocks. The company has a steady cash flow because it controls one-third of all U.S. phone lines, has won regulatory approval to offer long distance in every state it serves and has significantly reduced its debt load.

Nonetheless, a huge buyout program involving 21,000 Verizon employees was responsible for a 50-percent decline in net income in its most recent quarter. It has had to slash costs as it battles cable companies and new technologies for business. Its debt load remains among the largest in its industry.

Verizon shares are up 5 percent this year, after declines of 6 percent last year, 15 percent in 2002, 3 percent in 2001 and 16 percent in 2000.

The mixed emotions of Wall Street analysts about this telecom are due to the fact that, while it is a hard-charger in a rapidly growing business, it also faces strong competition and significant challenges in keeping down its labor costs.

The stock merits a consensus "hold" recommendation from the Wall Street analysts who track it, according to the Boston-based First Call research firm. This consists of six "strong buys," 10 "buys," 22 "holds" and one "sell."

Verizon's earnings are expected to decline 8 percent this year, compared with a 17 percent decline for the wire-line industry and a 20 percent gain for the wireless industry. Next year's expected 5 percent increase compares with projections of a 1 percent decline in wire-line and a 20 percent increase for wireless.

For the five-year annualized period, Verizon earnings are expected to rise 3 percent, vs. 4 percent for wire-line and 14 percent for wireless.

I have a diversified portfolio made up entirely of Vanguard funds. Do I need to be concerned about having all of my assets with a single fund family?

- D.K., Mount Prospect, Ill.

Investors should be concerned about having all of their assets with one fund family only if it offers a limited number of funds, the same portfolio manager runs most of them with a single philosophy or there is a significant overlap in its various fund holdings.

For example, investors have been burned by keeping everything with fund companies that were only growth, value or international shops. They were so specialized that all their holdings were hammered when trends turned against them. Similarly, some families offer many funds, but not many solid performers.

A fund family such as Vanguard Group, however, offers plenty of diversity and low expenses. While best known for index funds that aren't actively managed, it also offers good funds in most stock and fixed-rate categories.

There are advantages to keeping your holdings with one investment firm. "You can usually move money between the funds easily and there's one centralized statement that's easy to track," explained Martin Vostry, research analyst with Lipper Analytical Services in Denver.

I'm a middle-of-the-road investor with a small portfolio. I'm looking to add Gabelli Small Cap Growth Fund to it. What's your opinion?

- B.C., via the Internet

This fund has a 1.45 percent annual expense ratio that's about 0.25 percent higher than most no-load funds. In addition, its famous portfolio manager, Mario Gabelli, is richly compensated for his expertise.

But it has proven to be a steady performer, weathering any storm. It has been less volatile than its competitors, and Gabelli has been in charge of it since its 1991 inception.

There's some complexity here: The fund has the word "growth" in its title and has prospered by investing in media, telecommunications and industrial stocks, yet it displays a value philosophy by seeking out discount-priced stocks.

The $634 million Gabelli Small Cap Growth Fund (GABSX) rose 38 percent in value in the past 12 months and posted an 11 percent three-year annualized return. Both results rank just below the mid-point of small value funds.

"Gabelli tackles value from a different perspective, including media and telecom stocks but holding fewer of the financial-services stocks more typically found in value portfolios," observed Langdon Healy, analyst with Morningstar Inc. in Chicago. "This fund can be looked at as an investor's core small-cap offering."

Andrew Leckey is a Tribune Media Services columnist. E-mail him at yourmoney@tribune.com.

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