Verizon Wireless (NYSE: VZ) may not be coming to Canada anymore, but you don’t need to buy one of its products to own a piece of the U.S. telecom giant. This week a number of analysts upgraded the company’s stock price thanks to its US$130-billion move to purchase Vodafone’s 45% stake in its business.
One of those analysts was Oppenheimer & Co.’s Timothy Horan. He upgraded his 12-month price target from $55 to $56 on Sept. 2 and revised the company’s 2014 earnings per share from $3.17 to $3.56.
The purchase, he says, “underscores the optimism management has for this business” and it wants to be the sole beneficiary from increased wireless and cloud computing usage.
While investors had a negative reaction to the news—shares fell by 2.9% on Tuesday—Horan thinks it will pay off in the long term. Management expects the deal to be 10% accretive to EPS and he thinks they’re being conservative.
The company also announced a 2.9% dividend increase, which will beef up its already attractive 4.6% yield.
While this deal has been discussed for several years, Kevin Manning, an analyst at BMO Capital Markets, says the purchase was made now because of worries over rising interest rates.
Verizon is fueling this purchase with about $50 billion in debt. If interest rates rise further, which most people think they will, borrowing costs would certainly increase. As well, now finished with its LTE rollout, Verizon is also spending less on capital expenditures, so it’s generating more free cash flow to fund a deal.
Manning, who hasn’t changed his estimates, does think that Verizon paid an expensive price for its shares, but it’s still a positive move. “It (will) be highly accretive to shares,” he says. “We see little impact to operations and see it more as a capital allocation decision.”
Other analysts think this is also good news for investors. RBC Capital upgraded its rating from sector perform to outperform, while analysts at TheStreet reiterated their buy rating after the announcement.
Canadians may be disappointed they won’t be able to get their hands on a Verizon plan, but if these analysts are correct, purchasing the company’s stock looks like the better buy.