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Verizon Communications Inc. (VZ), AT&T Inc. (T), Sprint Nextel Corporation (S): Investors Are Seeing Red and That’s a Good Thing

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If you believe that wireless is the wave of the future, then you need to be invested in Verizon Communications Inc. (NYSE:VZ). Almost without fail, if you compare Verizon’s wireless results to their competition, the company some call Big Red is generating green like no one else. In case you doubt the company’s dominance, there are at least four measures that suggest otherwise.

Can you hear me now?

Some investors might question the idea of investing in Verizon Communications Inc. (NYSE:VZ) based on their Verizon Wireless business. Given that the company owns 55% of Verizon Wireless, and Vodafone owns the other 45%, until a few weeks ago I would have agreed. However, Verizon is putting its money where its mouth is, by ponying up a reported $130 billion to buy out Vodafone’s share of the business. Considering that at the end of last year, Verizon Wireless paid an $8.5 billion dividend to its parent companies, this 45% stake from Vodafone means the company received over $3.8 billion from this dividend.

While $130 billion seems like a large number to pay for Verizon Communications Inc. (NYSE:VZ) to get control of its Wireless division, the company’s ability to retain billions of dollars in cash flow seems to argue this deal makes sense. When you look at Verizon Wireless’ margins, you can see why Verizon wants complete control of this thriving business.

Apparently some investors aren’t really listening to what Verizon Communications Inc. (NYSE:VZ) is saying in its earnings reports. You would think that a company with margins that crush the competition would get more respect. In the most recent quarter, Verizon reported a wireless operating margin of 32.4%, which was significantly stronger than AT&T Inc. (NYSE:T)’s wireless margin of 27.1% or Sprint Nextel Corporation (NYSE:S)’s less than 1% margin.

What is particularly ironic about Verizon Communications Inc. (NYSE:VZ)’s high wireless margins is the fact that there have been multiple articles over the last year worrying about how smartphone upgrades are killing wireless carrier’s margins . Verizon reported over 80% of new postpaid activations, and now 64% of the company’s subscribers are using smartphones. If smartphones are hurting the company, why was Verizon able to grow wireless margins on a year-over-year basis?

When you consider that AT&T Inc. (NYSE:T) reported 88% of new postpaid subscribers chose smartphones, and Sprint Nextel Corporation (NYSE:S) reported 89%, you can see the trend is toward an increase in smartphone usage. With Verizon leading the way in subscriber additions as well, if smartphones are the bane of wireless carriers, the data doesn’t seem to bear out this conclusion.

If you build it they will come

While AT&T Inc. (NYSE:T) and Sprint Nextel Corporation (NYSE:S) both advertise that they are expanding their network, Verizon consistently advertises just how much more advanced their network is. If you want a visual of the coverage difference, look at the below three maps.

Source: CNN Money

As you can see, Verizon has a significant advantage when it comes to 4G LTE coverage area. In case investors question the importance of coverage, consider that Verizon consistently reports the best wireless additions and the lowest churn rate of its peers. In the last three months, Verizon added 941,000 new postpaid subscribers, AT&T Inc. (NYSE:T) added 551,000 subscribers, and Sprint Nextel Corporation (NYSE:S) subscribers were actually down 4.96% on a year-over-year basis.

While postpaid additions are important, it’s almost more important that the company retain its subscribers. It makes perfect sense that Verizon’s superior network might be a key reason the company retains its wireless customers at a better rate than its competition as well. Verizon’s most recent postpaid churn percentage was 0.93% compared to AT&T Inc. (NYSE:T)’s churn rate of 1.02% and Sprint Nextel Corporation (NYSE:S) at 1.83%.

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