Verizon Stock (VZ) Why I’m Hesitant to Buy After Warren Buffett

Verizon stock pays a 4.7% dividend yield! That’s more than three times higher than the 10-year treasury yield. And Verizon’s dividend looks safe for now. Management seems to think so as well. It just hiked its dividend for the 15th consecutive year

Verizon stock annual dividends 2012-2021

It wasn’t a big recent hike but the continued trend is great to see for income investors. And there are many reasons to like Verizon stock. Warren Buffett via Berkshire Hathaway bought shares back in late 2020. And he wasn’t just dipping his toes in the water. He bought $8.6 billion worth and that easily puts it in his top 10 publicly-traded holdings. 

Even before Buffett made that move, Verizon has consistently been towards the top of my buy list. And to be honest, it was great to see Buffett’s move. That’s a big stamp of approval. We have similar investment styles. Although, there are a few considerations that have still held me back when it comes to investing in Verizon. 

In this quick post, I’m going to share one small hesitation and one big one to buying Verizon stock. And if you find this research useful or thought-provoking, please let me know in the comments down below… or on my YouTube channel.

Buying Verizon Stock at a Discount to Warren Buffett’s Price

Based on Berkshire’s 13F filings, we can see Warren Buffett bought in at around $59.24 per share. And as of writing this post, Verizon stock last traded at $54.23. That means investors can buy it at more than an 8% discount to Buffett’s buy price. You can get a better deal than one of the world’s best investors! 

Over the past year, Verizon stock has bounced around. But overall, it’s trended down… 

VZ stock price Oct 2020 - Sept 2021

All else equal – with the company and economy – a drop in price creates a better buying opportunity. And there’s a good chance I’ll pick up a few hundred shares soon. But here’s my first (small) hesitation… 

Disruption is everywhere and by its very nature, it’s hard to predict. We live in a data hungry world with an increasing number of connected devices. And this bodes well for telecom companies like Verizon. Although, what changes might we see in the next 10 years? Or 20 years? And who will own those disruptive technologies? 

Already, we’re seeing big strides with low earth orbit (LEO) satellites. That’s thanks to Elon Musk’s SpaceX and Starlink. And across the board we’re seeing a wide range of communication technologies emerge and improve. 

In the near term, I highly doubt LEOs and other innovation will put a dent in traditional telcos’ sales. Especially when it comes to dense urban areas. Although, long-term it’s much harder to predict. I only have a hobbyist-level understanding when it comes to some of that tech. 

Disrupting Big Industries and Telecom Giants 

For a unique comparison… ten years ago, most analysts and experts would have thought there’s low-to-no chance that a new car company could compete against big auto. There are huge barriers to entry such as capital requirements, regulations, etc. But as we’ve seen, Tesla has proven a lot of naysayers wrong and is now worth more than most of them… combined! 

To stay competitive, the traditional automakers had to leverage up aggressively. Their balance sheets are loaded with debt and it’s a bit of a double-edged sword. Borrowing money has helped them compete… but it’s also limited their ability – and incentives – to innovate. If you’ve invested heavily in certain factory equipment, you need to use it long enough to hit a reasonable ROI.  

For another industry comparison, we’re seeing a similar situation with renewables chipping away at big oil. It’s a long transition and there’s still plenty of money to be made off fossil fuels, but debt-heavy oil companies are struggling to pivot. Across the oil industry, they’ve lost a lot of financial stability. 

Full circle… Verizon, AT&T and a few other telcos have built impressive moats. They’re also in an industry with huge barriers to entry. And this has required taking on massive piles of debt to stay competitive. With the recent race to provide 5G, we’ve seen debt levels shoot even higher. This leads me to my biggest concern with investing in Verizon stock… 

Verizon's total debt is a growing risk

In the past three years alone, Verizon’s total debt has climbed from $113 billion to $179 billion. That’s up close to 60%. Verizon’s revenue, on the other hand, is up close to 0% over that same timeframe… 

Verizon's revenue isn't growing much

For investors, these aren’t great trends to see. And they’re likely big factors that have helped push down Verizon’s stock price. Although, Verizon is still a cashflow machine and it can easily meet its debt payments, especially in our low interest rate world. With the leftover cashflow, Verizon can also easily cover its dividend payments. Although, if the trends I’ve shown you don’t change, the dividend won’t look nearly as safe in the next few years. 

For a more direct comparison, AT&T is also highly leveraged. It’s made some bad deals over the years and investors have also beaten down its share price. I bought AT&T stock back in late 2018 when the dividend yield hit 7.5%… 

AT&T share price 2018-2021

Not bad timing and I had some nice unrealized capital gains for a while. But since, it’s dropped back down. If you don’t count the dividends, I’m about at breakeven… but of course we need to count those dividends 😊. Those put me at average annual returns close to the long-term stock market average. 

AT&T recently announced it’ll be cutting its dividend next year. This will be a result of spinning off its media business, WarnerMedia, and merging it with Discovery in a Reverse Morris Trust. For income investors, this isn’t great to see but pending some unannounced deal details, I still like AT&T as an investment at its current price. 

I’ve highlighted AT&T as well because big telco dividends don’t look as safe as they used to be. Verizon is still in a better position but that might change. And given a more comprehensive market overview, along with average equity valuations, Verizon still looks like one of the best risk-to-reward income stocks. 

If you’d like to see a stock I like even more, check out why Alibaba stock now makes up close to 10% of my total portfolio. Also, please let me know if you have any comments down below. I read every one!

Invest mindfully,

Brian Kehm

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