Research Project BSc
An Analysis Of The Business And Financial Performance of Verizon Communications Inc. Over A Three Year Period
Registration # XXXXX
Submission Date XX Nov, 2016
Word Count: 7,320
Contents
Project Objectives and Overall Research Approach3
Reasons for Selection3
Topic3
Main organization3
Competitor3
Research Work4
Project Objectives4
Research Questions4
Research Approach5
Information Gathering and Accounting/Business Techniques6
INFORMATION GATHERING6
Sources of Information6
Information gathering6
Limitations of Information Gathering8
Ethical Issues9
ACCOUNTING AND BUSINESS ANALYSIS TECHNIQUES10
Ratio Analysis10
SWOT Analysis11
PEST Analysis12
Results and Analysis14
BUSINESS DESCRIPTION14
INDUSTRY OVERVIEW14
RATIO ANALYSIS15
Profitability Ratios16
Investment/Market Ratios21
Financial Leverage Ratios26
SWOT ANALYSIS27
Strength28
Weaknesses28
Opportunities28
Threats28
PEST ANALYSIS29
Political Factors29
Economic Factors30
Social Factors31
Technological Factors31
Conclusions And Recommendation33
RATIO ANALYSIS33
SWOT ANALYSIS34
PEST ANALYSIS35
References36
Appendix A – Balance Sheet and Income Statement41
BALANCE SHEET41
INCOME STATEMENT43
Project Objectives and Overall Research Approach
I have chosen the topic “The business and financial performance of an organization over a three year period,” for my Research and Analysis Report. For my analysis, I will be focusing on Verizon Communications Inc., a U.S.-based communications company.
Reasons for Selection
Topic
I considered different factors before selecting the topic of my Research and Analysis Report. And I believe that this topic will help me understand how to research and analyse data more effectively. In addition, this topic is not only relatively easy to understand, but the information required to conduct an analysis for public companies, is also easy to find, especially for U.S.-based companies. U.S.-companies that are publicly traded are required to file their annual statements with the U.S. Securities and Exchange Commission, which makes it easy to obtain the information.
Furthermore, I think that analysing the financial statements will help me understand how the different aspects of the financial statements relate to each other and how they come together to reflect a company’s financial and business performance.
Main organization
I have selected Verizon Communications Inc. for the purpose of my project. It is a publicly traded company, which currently trades on the New York Exchange market. The company is currently ranked among the world’s biggest telecommunication companies.
According to Investopedia, Verizon Communications, which is the second largest telecommunication company in the world, had a market value of $202.5 billion in 2015. [ CITATION Inv16 \l 1033 ]
Competitor
AT&T Inc., which trades on the New York Stock Exchange (NYSE) under the trading symbol “T,” followed Verizon as the second biggest telecommunications company in the United States and third largest telecommunication company in the world. [ CITATION Inv16 \l 1033 ] The company provides mobile services, high-speed internet and smart solutions for end consumers and businesses. [ CITATION ATT16 \l 1033 ]
Research Work
Project Objectives
After reviewing the information pack and the topic I had selected for my research and analysis project I came up with the following project objectives.
To understand the operations of telecommunications company.
Conduct the financial and business analysis of the company over the period of three years.
Conduct a peer comparison.
To present unbiased conclusion from the analysis.
To provide any recommendations as a result of the analysis.
To draw the skills and learnings statement expressing what I have learned from the experience.
Research Questions
To analyze the company and provide a meaningful analysis, I have laid down the following research questions:
How is the telecommunications industry performing and what part it plays in the U.S. economy?
What different ratios will I need to analyze the companies and evaluate their financial performance?
What models will I need to conduct the business performance of the company?
How to draw an unbiased conclusion from my research and provide any recommendation if possible that can prove beneficial for the company?
Research Approach
After selecting the topic, with the help of the information package it became clear to me how I would want to approach my project. There were three mains steps to my research approach:
After finalizing my approach and completing the first step, I moved on to the next part of my project, which information gathering and the accounting and business techniques I would require to conduct my analysis.
Information Gathering and Accounting/Business Techniques
INFORMATION GATHERING
Sources of Information
We can use different types of sources to conduct our analysis. These sources need to properly vetted and researched before being relied on. In addition, to conduct an unbiased and comprehensive analysis, we also need to be aware of any of their inherent limitations.
A quality information is:
Fit for purpose
Reliable
Valid
Accessible
Accurate
Timely
Cost effective
Relevant
Easy to understand [ CITATION Con16 \l 1033 ]
For my project, I looked into secondary sources of information, while keeping these characteristics in mind. As my analysis is based on the company’s financial statements, I was aware that I do not need to contact the company for any primary data as all the information that I require will be available publicly in the company’s annual reports.
Information gathering
I tried reaching out to the company through email and phone calls to obtain some first-hand insight into its strategy, current operations and business objectives. However, they decided not to provide any information for the sake of confidentiality.
Therefore, for the purpose of my analysis, I decide to use secondary sources of information. A secondary source of information is one created on the basis of a primary source of information. Secondary sources, that are built off of primary sources of information usually summarize and analytically interpret the information from the primary materials. [ CITATION Wil16 \l 1033 ]
However, before using any type of secondary information, I wanted to make sure that the source is trustworthy and the information is vetted, to ensure that no misrepresentation is taking place in the analysis. Furthermore, it is also important to use the most recent sources. If one ends up using an old source, one should make sure to double check if there are any alterative reports on the older source and if there are any criticisms to the approach provided in the older source. [ CITATION Uni16 \l 1033 ]
Verizon Communications is publicly traded company in the United States. Publicly traded companies in the United States are required by law to submit their annual and quarterly financial results with the U.S. Securities and Exchange Commission. The financial reports of these companies are also easily available on the company’s websites.
Furthermore, with the help of the internet, it is also extremely easy to collect information online, without feeling the need to contact the company and obtaining primary material. Some of the sources have been highlighted below:
Company websites:
Company websites made it easy for to access the company information and financials I needed to collect the basic information for the companies and their financial data.
Verizon. https://www.verizonwireless.com/
AT&T Inc. https://www.att.com/
SEC website:
I used the SEC website to access any other filing that might not have been available or easily accessible on the company website. https://www.sec.gov/
ACCA textbooks:
I used the ACCA text books to refresh on my basic understating of the different tools I used to analyse the financial and business analyses of the company.
Books and Scholarly articles:
The text books and the Scholarly articles available on Google can help with approaching the market analysis in an effective manner.
News publications:
Various news publications helped me collect timely information on the companies and also provide the most recent developments with the company. For instance, BBC, CNBC, The Wall Street Journal.
Expert Opinion:
I was also able to find the opinions of industry experts that helped me understand what the industry is currently facing and how it might progress.
Other websites:
I most frequently visited www.google.com, and www.investopedia.com to gather information online regarding basic definitions and formulas.
Limitations of Information Gathering
I decided not to use any primary data, considering the topic I thought that I can easily conduct the analysis using secondary information. The main issue that came around while gathering information was to make sure that I research all avenues to collect most comprehensive information.
Verizon Communications is a complex organization that does not deal with only one business segment. While collecting information, first of all I needed to make sure that I understand their operations. After reading up on the industry and how it works, I decided to look up other sources that can tell me the best way to do justice to all the company segments. Unfortunately, because of the word count limitations I decided to create the report as in not to get into too much details and provide the information as comprehensively and precisely as possible.
It is normally a little difficult to get the most relevant data online, but considering the size, rank and market segment of the company I was able to find multiple sources. However, with that advantage comes the disadvantage of deciding what to use and what not to use. The amount of information that I was able to find on the company made it difficult to do justice to the topic and include everything that I looked up. Therefore, I decided to focus on the company’s financial reports, some industry observer commentary and market information of the company to see how it is performing. Whatever sources I used, I tried my level best to source them appropriately so that they can be easily traced and vetted.
Lastly, considering the limitation of not being able to get some first-hand information from the company, I was unable to provide a proper insight into the company’s approach towards achieving its goals and the strategy it is currently implementing.
Ethical Issues
I came across a few ethical concerns while working on my Research and Analysis project. Verizon is ranked among the top telecommunication companies in the world. While gathering information and analysing the data, I needed to make sure that my opinion of the company and conclusions are not affected by the company’s brand recognition and reputation. In order to do that, I needed to approach the data and analysis without bias and integrity.
Furthermore, as I was relying on secondary sources of information, I needed to make sure that my sources paint a complete picture for the company. I needed to make sure that my analysis does not miss any crucial information, so that the conclusions are not comprehensive.
My next concern was to keep my research and data confidential so that it is not used for any other purpose or gets copied without my knowledge.
Currently, there are a lot of opportunities available to outsource the research project, and while the option is very tempting I decided against it. I realised that if I decide to pursue this option, I might miss an opportunity to learn something that will become handy in my future endeavours. I also did not want to lie and present someone else’s work as my own.
ACCOUNTING AND BUSINESS ANALYSIS TECHNIQUES
To conduct the financial and business analysis of Verizon I concentrated on ratio analysis for the financial analysis and SWOT and PEST analysis for the business analysis.
Ratio Analysis
Ratio analysis helps us analyse a company’s financial performance in a quick manner by looking into several key performance metrics of the company. It is a quick tool to analyse a company’s financial strengths and weaknesses as the required data is already available online.
Ratio analysis is based on the financial data reported by the company in its financial statements that includes balance sheet, income statement and cash flow statement. [ CITATION Bus162 \l 1033 ]
Limitations of Ratio Analysis:
There are some inherent limitations to the topic. As the analysis is based on financial statements, which are based on accounting principles, it is limited by the accounting practices applied by the company. Furthermore, the data provides a historical picture of the company’s performance and ignore any upcoming strategic initiatives that have not yet been reflected in the company’s accounting data.
Also, to conduct a ratio analysis and see how the company is performing, its results need to be compared over a period of time, for instance over the last three or five years, or with one of its peers. The analysis on its own will not provide a complete picture of how the company is performing.
Additionally, just the financial data will not be enough to come up with a comprehensive and unbiased conclusion. The company’s business performance, based on qualitative factors, will also need to be considered before making any conclusions.
SWOT Analysis
SWOT assesses the strengths and weaknesses of an organization against the opportunities and threats that may arise. In order to conduct this analysis we need to look into the internal and external environment of the company.
Limitations:
SWOT analysis is highly subjective, as it based on the available information and might miss some crucial points. In addition, A SWOT analysis should be concise and simple. So it might end up oversimplifying the problem, while in reality, there are several factors that are complex in nature and might lead to an incomplete picture. [ CITATION Sma16 \l 1033 ]
PEST Analysis
PEST, an acronym for, Political, Economic, Social and Technological analysis is a tool used by companies to evaluate the environment that they’re operating in. [CITATION Pes16 \l 1033 ]
Political: Existing political factors, global or native that can affect a company's operations, including government laws and regulations.
Economic: Any economic issues that play a part in the company operations and performance. Mainly include interest rates and foreign exchange rates.
Social: Analysing the cultural and demographic factors of the company's target market and seeing how the company can fulfil its consumers' needs that might help the company increase its sales. The analysis includes age distribution, lifestyle changes, environmental issues, and educational issues among other factors.
Technology: Looks into the recent technological advancements that might be important to the company's progress. [ CITATION Bus161 \l 1033 ]
Limitations:
Economic conditions are changing continuously, so it's important to conduct the analysis more regularly to make it more effective. In addition, this tool should be used with other techniques like SWOT analysis. Furthermore, the use of this technique, considering that the data required to conduct the analysis might be restricted, makes it difficult to make a comprehensive conclusion. [ CITATION Fre16 \l 1033 ]
Results and Analysis
BUSINESS DESCRIPTION
Verizon, which was formed on June 30, 2000, was created after the merger of Bell Atlantic Corp. and GTE Corp. The company is based in New York, and was incorporated in Delaware. Based on the number of subscribers, the company is one of the top telecommunication companies in the U.S., followed by AT&T Inc.
The company, through its various subsidiaries, provides entertainment, information, and communications products and services to consumers and businesses. The company offers voice, data and video services through its wireless and wireline networks, including Verizon Fios, which is a fiber-optic network that provides internet, TV and digital voice services. [ CITATION Ver16 \l 1033 ] Therefore, the company reports its financial data through two segments, Wireless and Wireline.
The company’s wireless network, which operates as Verizon Wireless, provides voice and data services and equipment sales in U.S. While, the company's Wireline operations provides communication products and enhanced services including broadband data and video, corporate networking solutions, data center and cloud services, local and long distance voice services, to the company’s end consumers, businesses or government agencies. The company's wireline operations also own one of the most expansive end-to-end global Internet Protocol networks. [CITATION Ver \l 1033 ],[CITATION Ver1 \l 1033 ]
INDUSTRY OVERVIEW
"The telecom sector continues to be at the epicenter for growth, innovation, and disruption for virtually any industry," according to Craig Wigginton, a vice chairman and US telecommunications leader at Deloitte & Touche LLP.
As the technology is advancing and becoming a part of the day-to-day life of end consumers, Deloitte's latest Global Mobile Consumer Survey found out that US consumers, on an aggregate basis, look at their devices over 8 billion times a day. Such findings showed that these developments are greatly important to all sectors within the telecom industry including wireless and wireline/broadband carriers, and device manufacturers, among others.
The article noted that telecommunications companies will have the opportunity to grow their revenue through their core operations such as network connectivity, equipment and devices, as the demand for devices requiring mobile connectivity grows.
[ CITATION Del16 \l 1033 ]
Telecommunications industry went through massive developments even during the recession period. The human need to stay connected has helped the industry to digitize and grow on a rapid pace. The telecommunication companies are not only growing their revenues and shareholder returns through strong dividend growth, they are also expanding their geographic footprint. The industry has different opportunities in front of it that will help the companies grow. [ CITATION Zac161 \l 1033 ]
RATIO ANALYSIS
For my ratio analysis, I compared Verizon Communications' financial over the last three years from 2013 to 2015 with AT&T Inc., another leading mobile telecommunications company in the U.S., which ranked second according to Investopedia. [ CITATION Inv16 \l 1033 ]
Profitability Ratios
Profitability Ratios
Ratio
Verizon
AT&T
-
Gross margin (%)
74.18
60.71
62.76
54.33
54.59
60.24
Operating margin (%)
25.12
15.42
26.52
16.88
9.22
23.88
EBIT margin (%)
25.19
15.88
26.50
16.90
10.55
24.85
EBITDA margin (%)
37.36
28.89
40.27
31.90
24.34
39.13
Net Income Margin (%)
13.96
9.41
19.53
9.32
5.09
14.54
Profitability ratios help analyse a company's ability to generate earnings during its normal course of business, while accounting for the expenses and other related costs incurred by the company over the same time period as of the revenues. If the profitability ratios of a company increase as compared to its previous fiscal periods or are higher as compared to its peers and/or industry averages, it implies that the company is doing better.[ CITATION Inv161 \l 1033 ]
Tracy (2012) noted that for the financial analysis of a company, its profitability ratio is one of the most popular and key ratios, as the final goal for every company, every business is to generate profit. A company’s ability to generate profits is not only important for the company itself, but also for its investors. [CITATION Tar12 \l 1033 ]
The financial data of Verizon Communications shows that the company was able to increase its profitability over the last one year. The company’s profitability metrics dipped in 2014, as compared to the levels in 2013, but the company managed to bring them back up in 2015. Verizon Communications reported gross margin of 74.18%, operating margin of 25.12%, earnings before interest and tax margin 25.19% compared to its revenues and net income margin of 19.96% in 2015.
According to the company financials, even though its profitability dipped in 2014, over the three year period of 2013 to 2015, the company’s total sales have been increasing over the time period. According to the financial data, the company increases its total sales, which comprises of service revenues and wireless equipment revenues by approximately 4.1% in 2013, 5.4% in 2014 and 3.6% in 2015. ($131.62 billion: 2015, $127.08 billion: 2014, $120.55 billion: 2013)
The company’s financial data shows that the company saw a slight decline of 1.22% in its service revenues in 2015, while it grew in 2014 by approximately 3.26%, ($114.70 billion: 2015, $116.12 billion: 2014, $112.45 billion: 2013). However, the company's wireless equipment sales grew approximately 35.34% and 54.46% in 2014 and 2015, respectively. ($131.62 billion: 2015, $127.08 billion: 2014, $120.55 billion: 2013).
The company Chairman and CEO Lowell McAdam said in his letter to shareholders that a "steady demand" for mobile and consumer broadband helped the company grow its revenue in the year 2015. The company recorded 112.1 million retail wireless connections, 7 million Fios Internet subscribers and 5.8 million Fios Video subscribers, for the year ended 2015. (Verizon Communications Inc. Annual Report 2015)
On a detailed look at the company’s comments on its financial performance, the company’s Wireline segment saw a 1.8% decline in its revenues for the year ended 2015, mainly because of lower revenues in Global Enterprise. Global Enterprise reported lower revenues because of the negative impact of foreign exchange rates and reduced voice services and data networking revenues. Verizon Communications counterbalanced the lower revues with higher consumer retail driven by Fios.
However, the company plans to build its Wireline segment around data, to compensate for decreasing demand for traditional voice service. In addition, the company also expects to show revenue grow in its Wireless segment in 2016, driven from higher sale of devices under the Verizon device payment program.
Furthermore, the company reported a 0.96% churn rate in the year of 2015. The churn rate is defined as the percentage of customers that leave for another carrier each month. The company report added that Verizon Communications led the industry in 2015 in customer loyalty based on its churn rate. The company CEO believes that the company’s new brand campaign "better matters" is a contributing factor, which is not only focusing on network quality, but the whole customer experience. Under this campaign, the company is focusing on designing its products as per the customers' demands. It is also focusing on the millennials as they behave separately than traditional customers.
AT&T Inc., on the other hand showed tremendous growth in its total revenues in the year 2015. The company grew its total revenues by approximately 10.8% in 2015, compared to a 2.87% increase in 2014 and 1.03% increase in 2013.
The company's service revenue also increased 11.18% in 2014, compared to a slight decline of 0.68% in 2014 and a slight increase of 0.63% in 2013. The company's revenue from equipment sales, however, increased 7.95% in 2015, in contrast with a 47.47% increase in 2014 and a 6.4% growth in 2013.
The company's profitability metrics, also decline over the three year time frame. The company reported a net income margin of 9.32% in 2015, higher than 5.09% in 2014, but significantly lower than 14.54% in 2013. [ CITATION ATT15 \l 1033 ]
Investment/Market Ratios
Market/Investment Ratios
Verizon
AT&T
Closing Price at year-end ($)
46.22
46.78
49.14
34.41
33.59
35.20
Price-to-EPS (times)
10.58
19.33
12.29
14.52
27.09
10.29
Dividends declared per share ($)
2.23
2.16
2.09 -
Dividend Payout Ratio (%)
51.03
89.26
52.25
79.75
149.19
52.92
Price increase (%)
(1.20)
(4.80)
13.57
2.44
(4.57)
4.42
Dividend Yield Ratio (times)
4.82
4.62
4.25
5.49
5.51
5.14
In its 2015 Annual report, Verizon Communications reported diluted earnings per share of $4.37 for 2015, $2.42 for 2014 and $4.00 for 2013.
In addition, the company reported dividends declared per share of $2.23, $2.16, and $2.09, for 2015, 2014 and 2013, respectively.
For any prospective and possible investment opportunities, the investors try to analyse the company’s market performance by looking at its stock price. In order to do so, investors generally compare the company’s stock price with an indicator of the company’s performance. For instance, its profitability, or assets held by the company or returns to its shareholders in the form of dividends. [CITATION MyA16 \l 1033 ]
Based on the latest annual financial report of Verizon Communications, the company’s stock price as of the last day of the reporting period showed a consistent decline in the years 2014 and 2015, which was 1.20% and 4.80, respectively. In comparison, the company’s share price at the end of 2013, showed a 13.57% increase as compared to its closing price as of the year end 2012.
In contrast, AT&T Inc. showed a 4.57% drop in its closing price, as of the year end 2014, compared to a 4.42% increase in 2013. Nonetheless, AT&T recovered its closing price at the end of 2015 with an increase of 2.44%.
Comparing Verizon Communications' closing price with the company’s EPS, the company reported a price to earnings multiple of 10.58 times, 19.33 times and 12.29 times, for the years 2015, 2014 and 2013, respectively. As the numerator, the company’s stock price decreased over the years, and its diluted EPS increased, the price to earnings multiples also show a decline over the same time span.
In comparison, AT&T reported a fluctuating trend in its EPS over the last three years. The company reported diluted EPS of $2.37, $1.24 and $3.42, for 2015, 2014, and 2013, respectively. When compared to the company’s closing price for 2015, 2014 and 2013, AT&T reported a price-to-earnings multiple of 14.52 times, 27.09 times, and 10.29 times.
Furthermore, in light of the company’s financial data, Verizon Communication's reported a dividend pay-out ratio of 51.03%, 89.26%, and 52.25%, for 2015, 2014 and 2013, respectively. Looking at the annual data for the three year period, it seems like Verizon Communication maintained its declared annual dividends in a certain range, from $2.09 to $2.23, which increased slightly every year. However, according to the financial data, the company’s dividend pay-out ratio increased in 2014 from 52.25% in 2013 to 89.26% in 2014 and then fell to 51.03% in 2015.
In comparison, AT&T Inc. displayed a dividend pay-out ratio of 79.75%, 149.19% and 52.92% in 2015, 2014 and 2013, respectively. In absolute numbers, the company declared annual dividends of $1.89, $1.85, $1.81, respectively.
Dividend pay-out ratio reflects how much earnings a company is returning to its shareholders and how much it is retaining in order to reinvest. [ CITATION Inv162 \l 1033 ]
More relevant to new investors, is the dividend yield ratio. Dividend yield ratio compares the dividend declared by the company with its stock price. According to the latest annual financial data of the company, Verizon Communications, reported a dividend yield of 4.82%, 4.62% and 4.25%, for 2015, 2014 and 2013, respectively.
In comparison, AT&T Inc. generated a dividend yield of 5.49%, 5.51% and 5.14% in 2015, 2014 and 2013, respectively. Although Verizon Communications generated a lower dividend yield, Verizon Communications showed a consistent, although slight, increase over the years.
However, dividends are not the only way to return profits to shareholders. According to the company’s annual statement for the year ending 2015, Verizon Communications plans to continue selling some of its telecom properties that do not streamline with its current strategic objective. The company used some of the proceeds to its shareholders through accelerated buybacks and planned to repay some of its debt in 2016.
At the time of the filing, Verizon Communications was in the process of selling some properties to Frontier Communications Corp. The deal was completed on April 1, 2016. [ CITATION Bus16 \l 1033 ]
Indices-
S&P 500 at period end
2,043.94
2,058.90
1,848.36
Dow Jones
17,425.03
17,823.07
16,576.66
Change in year-end values
-
Verizon
12.13
7.85
13.57
(4.80)
(1.20)
AT&T
2.93
11.47
4.42
(4.57)
2.44
S&P 500
(0.00)
13.41
29.60
11.39
(0.73)
Dow Jones
5.53
7.26
26.50
7.52
(2.23)
From 2011 to 2013, the Verizon’s stock price continued to appreciate, along with AT&T Inc., and broader market indices including S&P 500 and Dow Jones. According to the data collected through Yahoo finance, for Verizon Communications, AT&T and broader indices, including S&P 500 and Dow Jones, the trend showed that both Verizon Communications and AT&T showed significant price appreciation along with the broader markets.
However, the Verizon’s stock price severely underperformed as compared to AT&T, S&P 500 and Dow Jones in 2014 and 2015.
Over the last three years, Verizon communications' closing price increased 13.57% by the year end of 2013, but fell 4.80% in the end of 2014 and a further 1.20% by the end of 2015. In comparison AT&T's closing price increased 4.42% by the year end of 2013, but fell 4.57% in the end of 2014 and increased again by 2.44% by the end of 2015. Meanwhile, S&P 500 increased 29.60% in 2013, increased 11.39% in 2014 and decreased 0.73% in 2015, and Dow Jones increased 26.50% in 2013, jumped 7.52% in 2014 and fell 2.23% in 2015. [CITATION Yah16 \l 1033 ][ CITATION Yah161 \l 1033 ][ CITATION Yah162 \l 1033 ][ CITATION Yah163 \l 1033 ]
Although it seems like the broader markets have also fell in 2015, the decrease in the stock price of Verizon is more significant. Whereas, on the other hand, AT&T Inc. managed to keep its market price up.
Financial Leverage Ratios
Financial Leverage Ratios
Ratios
Verizon
AT&T
-
Debt ratio (times)
0.42
0.47
0.33
0.29
0.26
0.25
Debt-to-equity-ratio (times)
12.69
15.97
1.87
3.17
3.32
2.93
Interest cover (times)
3.73
2.43
8.83
3.32
1.86
4.75
Whenever a company finances its operations or assets through any type of source of finance which is carrying a fixed charge, for example different types of debts including subordinated debt, preferred stock or leases, the firm is classified as financially leveraged. As a result, the financial leverage management ratios measure the extent of the financial leverage that the company is carrying. [CITATION MOY11 \l 1033 ]
Considering the total assets, equity and liabilities reported by Verizon Communications, the company has a debt ratio of 0.42 times in 2015 as compared to 0.47 times in 2014 and 0.33 times in 2013. Based on the reported data, the company displayed a debt to equity ratio of 12.69 times in 2015, 15.97 times in 2013 and 1.87 times in 2012. Looking at the annual statement of the company, Verizon Communication's reported a decrease in its long term debt in 2015, which stood at $89.66 billion in 2013, increased to $110.03 billion in 2014 and decreased to $103.24 billion in 2015, which calculates to an approximate decrease of 6.2% in 2015. Furthermore, the company reported an increase in its total equity. Because of $56.58 billion in non-controlling interests, Verizon Communications reported a total equity of $95.42 billion in 2013, which fell to $13.68 billion in 2014, and increased year-over-year to $17.84 billion in 2015. Because of the approximately 30.46% increase in the total equity, as compared to the last year, the company reported a lower debt-to-equity ratio in 2015.
As mentioned earlier, the company’s annual statement mentioned that Verizon Communications planned to use some of its net proceeds from the sale of certain operations to repay some of its debt in 2016.
In contrast, AT&T reported debt ratio of 0.29 times in 2015, slightly high from 0.26 times in 2014 and 0.25 times in 2013. Furthermore, the company’s debt-to-equity ratio was almost consistent over the last two years at 3.17 times in 2015, 3.32 times in 2014 and 2.93 times in 2013, and significantly lower than Verizon Communications.
Furthermore, Verizon Communications reported an increase in its interest cover ratio in 2015. The company's interest cover ratio was 3.73 times in 2015, as compared to 2.43 times in 2014 and 8.83 times in 2013. The company reported total interest charge of $2.67 billion in 2013, which increased to approximately $4.92 billion in 2014 and 2015. Whereas, the company reported total profits of $23.55 billion in 2013, $11.96 billion in 2014 and $18.38 billion in 2015.
In comparison, AT&T reported an interest cover ratio of 3.32 times in 2015, 1.86 times in 2014 and 4.75 times in 2013. The company's total interest charge was $3.94 billion in 2013, $3.61 billion in 2014 and $4.12 billion in 2015. Whereas, the company's total profits were $18.72 billion in 2013, $6.74 billion in 2014 and $13.69 billion in 2015.
SWOT ANALYSIS
SWOT analysis helps us gain insight into the historical data, which can be used to come up with solutions for any future problems that might be faced by an organization or institution. [CITATION Uni08 \l 1033 ]
Below mentioned is the current SWOT analysis conducted for Verizon Communications:
Strength
Ranked no. 1 among U.S. telecommunication companies, and no. 2 worldwide.
Brand recognition.
112.1 million Wireless retail connections.
Largest wireless carrier in the United States.
Approximately 177,700 employees.
Involvement in the communities to bring education and innovation to all areas.
A leader in 4G LTE wireless technology.
Weaknesses
Only operates in U.S.
Competitive prices as compared to other players in the market.
Overlapping products between different players in the market.
Opportunities
Growth opportunities in global markets. Verizon Communications is currently focused and dependent on the U.S. market. With the technological advancements and increased demand for technology all over the globe, with the company’s resources it is positioned to take advantage of the situation.
Innovations in Internet of Things (IoT) area. The company is already looking into it and has launched a few products, but further advancements can set the company apart from its competitors.
Growing demand for mobile communications and products.
Threats
Increasing government regulations. The regulatory bodies believe that the current status of telecommunications companies in the Business Data Services market has led to overcharging of services and the regulatory body plans to propose rules that can regulate pricing in the sector.
Workers strike, where almost 40,000 of Verizon workers went on strike, over concerns that the company is planning to shift its call centers overseas. [ CITATION Dem16 \l 1033 ] The company afterwards reached a deal with 36,000 workers on strike. Pursuant to the deal terms, the company reached an "agreement in principle" with the workers on a four-year contract. [ CITATION CNN16 \l 1033 ] Such advancements are a threat to the company's operations and can seriously hinder its performance and progress to achieve its retargets.
Increased competition. According to the article on Nasdaq, citing Zacks Equity Research, Verizon Communications and AT&T Inc. currently control 68% of the wireless market in U.S., whereas Sprint Corp. and T-Mobile US Inc. control the rest of 32%, collectively. These smaller companies are currently working on introducing cheaper products in the market that can attract the existing customers from the larger companies.
[ CITATION Zac16 \l 1033 ]
PEST ANALYSIS
Bensoussan, B. and Fleisher C. concluded that the PEST analysis, which is the acronym for political, economic, social and technological analysis of a company, can influence the competitiveness of that company with its peers. However, even though this analysis is important, it might not make a huge difference, rather a small or minimum contribution to the company’s strategic direction, as several factors might just be out of the company’s control. Or the company might look at the environment as "too uncertain to do anything about." [ CITATION Fle08 \l 1033 ]
The PEST analysis for Verizon Communications is as under:
Political Factors
Because of globalization, global companies are very easily affected by the political factors worldwide.
Although, Verizon Communications is mainly focused on the U.S. market, considering the market share of the company, it makes sense to assume that the company conducts regular analysis of the political situation. Most recently, one of the most prominent political aspect of the global market was the Brexit vote.
The Brexit vote, which covered if the United Kingdom should remain a part of European Union, was cast on June 24. After the vote, it was decided that United Kingdom will leave the European Union. [ CITATION BBC16 \l 1033 ]
Following the vote, there were concerns of a possible U.S. recession and negative global interest rates. Investor's Business Daily reported that analysts do not expect these concerns to affect the telecommunication companies. [ CITATION Inv163 \l 1033 ]
The other major, most important factor in the political analysis is the upcoming Presidential election in the U.S. Following the latest strike at Verizon Communications, the Presidential candidates had different reactions. According to one of the reports, Donald Trump did not comment on the strike by the Verizon workers concerning the company's plans to offshore its call centers. [ CITATION Pol16 \l 1033 ] Meanwhile, the Communications Workers of America, the largest U.S. communications and media labor union, endorsed Democratic nominee Hillary Clinton on July 11, according to an article on Morning Consult. The union praised the candidate for "her commitment to making life better for working families.” [ CITATION Mor16 \l 1033 ] The article added that 700,000 workers in the telecom, cable and broadcast fields are currently being represented by the union.
Economic Factors
With the recent developments in the U.S. and global economy, the Federal Reserve has decided to maintain the interest rates. Although the market observers are expecting the U.S. Federal Reserve to raise rates, the outcome, based on the recent economic data including the employment situation reports, the ISM non-manufacturing index and the global economy situation is undecided.
In a recent article from the CNBC, the author noted that the recent report on the ISM non-manufacturing index, the index was at a six-year low. [ CITATION Jef16 \l 1033 ] According to the article, the recent release in the numbers suggested that the Federal Reserve might not increase interest rates this year at all, let alone in its recent meeting on Sept. 20 to Sept. 21, or December in 2016.
However, a later article from The National, suggested that the Federal Reserve might have the window to raise rates in the September meeting without disrupting the markets too much, based on the timing of Presidential elections, the latest employment situation report and the implications from the results of the upcoming Presidential elections. [ CITATION The16 \l 1033 ]
Furthermore, there was some economic fallout from the Brexit vote. However, according to the article on Investor’s Business Daily, the analysts expect the vote to help the telecommunications companies grow their free cash flow, despite slow wireless growth and regulatory headwinds. [ CITATION Inv163 \l 1033 ]
Social Factors
The company noted in its corporate responsibility report that Verizon Communications is actively involved in making the communities that it operates in a better place. The company is currently using its technological advancements to increase educational awareness in its communities. In addition to that, Verizon Communications is leveraging its innovative technology to address societal challenges. [ CITATION Ver161 \l 1033 ]
Furthermore, the company also launched a recent brand campaign “better matters” which is helping the company focusing on the m Millennials. Millennials currently make most of the company’s target demographics. With the rapid changes in technology, the end consumers’ demands are changing as well, especially that of the millennials as their requirements are different from those of the existing customer base.
Technological Factors
With the rapid changes in the technology, the demands of the consumers are changing. There is an increased demand for mobile devices, which is resulting in increased demand for the mobile telecommunications companies.
But in addition to increased demand for services, the customers also demand increased security and privacy. The concerns related to cyber security have increased so much that the U.S. White House recently appointed a Federal Chief Information Security Officer, who will be responsible for cybersecurity policy, planning, and implementation across the Federal Government. [ CITATION Dig16 \l 1033 ]
The consumers are also concerned with cyber-crimes and frauds. With the increased demand for digital advancements, the companies also need to focus on maintaining and enhancing the cyber security around its operations. The various cases of cyber-attacks and cyber-crimes has made it more important for end consumers to install the corrective measures at their ends. [CITATION The161 \l 1033 ]
Conclusions And Recommendation
After conducting a detailed ratio analysis for Verizon Communications Inc. and looking into the internal and external factors that can influence the company’s operations or performance, it can be assumed that Verizon Communications is very well-positioned to avail new opportunities and build on them further. The company is already the no. 1 telecommunications company in the United States, the next step will be to become the no. 1 telecommunications company in the world.
RATIO ANALYSIS
The financial performance of the company suggests that the company's profitability metrics that fell in the year 2014, as compared to 2013, rebound in 2015. In addition to that in 2015, the company also reported significant growth in its operating income margin and net income margin, while achieving a significant growth in its EPS as well. Furthermore, overall the company’s profitability metrics are also stronger than its peer, AT&T Inc.
However, the main concern here will be to see if the company will be to able maintain this growth.
Furthermore, although the company was able to maintain the absolute pay-out to its shareholders in the form of dividends, its dividend pay-out ratio fell. In addition, the company also returned some capital to its shareholders in 2015, but it seems like besides all these efforts, the prospective investors might not be feeling confident about the company. As reflected by the company’s market performance, Verizon’s market performance in terms of price appreciation, price-to-earnings ratio, and dividend yield, though quite positive, was not above AT&T. The company might need to come up with more and better initiatives to build investor confidence. As the company’s profitability is already more than AT&T, the investors might be looking for something more than just profits.
As the company’s market performance reflected against the broader markets, the company is currently underperforming.
Having said that, the company showed prominent positive trends in connection with its financial leverage ratios. Although, the company’s leverage ratios do not reflect that the company is heavily leveraged, its ratios are significantly higher than AT&T, especially debt-to-equity ratio. Verizon’s annual statement shows that the company is planning to redeem some of its debts in 2016, which will hopefully reflect well on the company’s financial performance.
In addition to that, the company is in the process of shedding some of its properties to align its overall structure with its current strategic goals. This process usually requires some costs as companies general reorganize themselves. But afterwards, if it works out, can generate some hefty profits for its shareholders.
SWOT ANALYSIS
As mentioned earlier, Verizon Communications is the no. 1 telecommunications company in the U.S., and the second biggest telecommunications company in the world. The company’s brand recognition is a vital strength for the company.
However the company is only focused on the U.S. market, which can mean that it might be missing a lot of opportunities that might come with expanding its operations in other markets. In addition to that, the company needs to keep up with the technological advancements.
The company has the resources to keep up with the times, however, issues like the recent strike might hinder its ability to achieve its goals. The company needs to come up with a better game plan and strategy to deal with such issues. With the rapidly advancing market of technology, a workers strike might set the company back in terms of its gaols, while its competitors utilize the same hindrance as an opportunity to increase focus on its operations and goals.
Furthermore, the strike by Verizon Communications’ workers shed some light on the employee satisfaction level at the company. If the company employees, as many as 40,000 workers are not happy with the direction that the company is taking, it will reflect badly on the company, its management as well as its shareholders. Company employees are a vital stakeholder of the company that can make or break the machine that they are running. The company has signed a four year contract with most of these employees, however it needs to come up with a better game plan to make sure that such issues do not arise in the future.
PEST ANALYSIS
Conclusively looking into the PEST analysis, the company is currently taking advantage of the post-Brexit situation. However, the upcoming Presidential election in the United States is something that the company should be keeping an eye on, in terms of whether any of the upcoming policies from any of the candidates might create any regulatory hurdles for the telecommunications sector.
In addition, the company has the opportunity to explore the current cultural social norms as they relate to millennials which is the growing market these days. Millennials have different demands and preferences as compared to the existing customer market. If the company manages to be the go-to carrier for this growing market, it will be in a situation to build on it further.
Furthermore, the company needs to keep up with the technological advancements. The company’s 2015 annual report noted that Verizon is the leader for 4G connections and plans to lead the charge for 5G as well. Considering its size, market share, brand value and resources, the company has the capability to expand on this even further.
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Appendix A – Balance Sheet and Income Statement
BALANCE SHEET
2015 FY
2014 FY
2013 FY
As Of Date
12/31/2015
12/31/2014
12/31/2013
Currency
USD
USD
USD
(in millions)
Assets
Current assets
Cash and cash equivalents
4,470
10,598
53,528
Short-term investments
350
555
601
Accounts receivable, net of allowances
13,457
13,993
12,439
Inventories
1,252
1,153
1,020
Assets held for sale
792
552
NA
Prepaid expenses and other
2,034
2,685
3,406
Total current assets
22,355
29,536
70,994
Plant, property and equipment
220,163
230,508
220,865
Less accumulated depreciation
(136,622)
(140,561)
(131,909)
Plant, property and equipment, net
83,541
89,947
88,956
Investments in unconsolidated businesses
796
802
3,432
Wireless licenses
86,575
75,341
75,747
Goodwill
25,331
24,639
24,634
Other intangible assets, net
7,592
5,359
5,800
Non-current assets held for sale
10,267
0
NA
Deposit for wireless licenses
NA
921
NA
Other assets
7,718
5,564
4,535
Total assets
244,175
232,109
274,098
Liabilities and Equity
Current liabilities
Debt maturing within one year
6,489
2,735
3,933
Accounts payable and accrued liabilities
19,362
16,680
16,453
Liabilities related to assets held for sale
463
0
NA
Other
8,738
8,572
6,664
Total current liabilities
35,052
27,987
27,050
Long-term debt
103,240
110,029
89,658
Employee benefit obligations
29,957
33,280
27,682
Deferred income taxes
45,484
41,563
28,639
Non-current liabilities related to assets held for sale
959
0
NA
Other liabilities
11,641
5,574
5,653
Equity
Common stock
424
424
297
Contributed capital
11,196
11,155
37,939
Reinvested earnings
11,246
2,447
1,782
Accumulated other comprehensive income
550
1,111
2,358
Common stock in treasury, at cost
(7,416)
(3,263)
(3,961)
Deferred compensation - employee stock ownership plans and other
428
424
421
Non-controlling interests
1,414
1,378
56,580
Total equity
17,842
13,676
95,416
Total liabilities and equity
244,175
232,109
274,098
INCOME STATEMENT
2015 FY
2014 FY
2013 FY
As Of Date
12/31/2015
12/31/2014
12/31/2013
Currency Code
USD
USD
USD
(in millions)
Operating Revenues
Service revenues and other
114,696
116,122
112,454
Wireless equipment revenues
16,924
10,957
8,096
Total Operating Revenues
131,620
127,079
120,550
Operating Expenses
Cost of services (exclusive of items shown below)
29,438
28,306
28,534
Wireless cost of equipment
4,541
21,625
16,353
Selling, general and administrative expense
29,986
41,016
27,089
Depreciation and amortization expense
16,017
16,533
16,606
Total Operating Expenses
98,560
107,480
88,582
Operating Income
33,060
19,599
31,968
Equity in (losses) earnings of unconsolidated businesses
(86)
1,780
142
Other income and (expense), net
186
(1,194)
(166)
Interest expense
(4,920)
(4,915)
(2,667)
Income Before Provision For Income Taxes
28,240
15,270
29,277
Provision for income taxes
(9,865)
(3,314)
(5,730)
Net Income
18,375
11,956
23,547
Basic Earnings Per Common Share
Net income attributable to Verizon (actual)
4.38
2.42
4.01
Weighted-average shares outstanding
4,085
3,974
2,866
Diluted Earnings Per Common Share
Net income attributable to Verizon (actual)
4.37
2.42
4.00
Weighted-average shares outstanding
4,093
3,981
2,874
Consolidated Statements of Comprehensive Income
Net Income
18,375
11,956
23,547
Other Comprehensive Income, net of taxes
Foreign currency translation adjustments
(208)
(1,199)
60
Unrealized gains (losses) on cash flow hedges
(194)
(197)
25
Unrealized gains (losses) on marketable securities
(11)
(5)
16
Defined benefit pension and postretirement plans
(148)
154
22
Other comprehensive income (loss) attributable to Verizon
(561)
(1,247)
123
Other comprehensive loss attributable to non-controlling interests
496
2,308
12,035
Comprehensive income attributable to Verizon
17,318
8,378
11,620
Total Comprehensive Income
17,814
10,686
23,655
Net income attributable to non-controlling interests
496
2,331
12,050
Net income attributable to Verizon
17,879
9,625
11,497
Dividends declared per share
2.23
2.16
2.09