Tuesday, March 16, 2010

Verizon and Too Much Cash Syndrome

Verizon (VZ), the second largest communications company in America, has too much cash and they don’t know what to do with it. The firm has almost 100 million wireless users, or about 36% of the United States mobile market. That’s about the same number as all the mobile subscribers in Canada and Mexico combined.

With such a massive recurring revenue stream and resultant cash flows, Verizon has amassed a massive pile of cash of $2.5 billion. That’s about 3% of the value of the entire company, at a market capitalization of $85 billion. It's been at $10 billion just a few years ago and may even return to those levels. That cash pile is only going to grow – the company generates over $30 billion in cash per year.

Having such a large cash pile explains why the company trades at a dividend yield of 6.38%. That yield is one the highest on the market from a blue chip stock and is likely to remain either at or around a similar level going forward. Or it could be lower. I make no predictions.
Currently there is in existence a share buyback program which commenced in 2008 and allows the company to buy back 100 million of its shares. That’s about 1.17% each year. There were no repurchases of common stock during 2009. During 2008 and 2007, the company repurchased $1.4 billion and $2.8 billion of common stock, respectively.

So, with so much cash being generated, and with such a high dividend being paid out, what is Verizon going to do with all the extra cash?

Something really ridiculously silly, in my humble opinion.

According to a press release issued on Friday, “Verizon Communications Inc. will list its stock on the NASDAQ exchange along with its existing New York Stock Exchange listing. Verizon, whose ticker symbol is "VZ," has approximately 2.5 million share owners and approximately 2.8 billion shares of common stock outstanding. Verizon has a broad and diverse shareholder base, and we believe that the additional support provided by dual listing will benefit our current and potential investors.”

The annual listing fee for the NASDAQ is $95,000. There’s also an initial listing fee of $150,000. Assuming the above press release is correct, the average investor in Verizon has about $32,000 invested in the company. Just how making the shares trade on another exchange with little or no benefit to the “average” investor makes no sense to me whatsoever. Does Verizon want to increase the shareholder base to 5 million by “doubling” liquidity? What is the point of having millions of shareholders with little to no net worth in the company? There are also tremendous costs to mail out circulars and documentation to these investors, most of whom I’m guessing don’t read 10-Ks or Annual Reports.

There are a lot of academic studies that show managers with very large cash holdings can sometimes be lulled into a false sense of security and do things that are not beneficial to shareholders. This is one case in point. Listing in another exchange only serves to increase liquidity which encourages investors to trade frequently. It should be the goal of management to seek out long-term, dividend oriented investors who want to own a stake in one of America’s great companies. A secondary listing will not achieve this objective and is a cost to shareholders. Verizon is not a charity; it is a company operating for the ultimate benefit of the owners of its common stock.

I might just contact the other 2.45 million shareholders who hold 1,100 shares and start a proxy fight.

I originally published this article at BestCashCow.