Thursday, July 7, 2022
HomeInvestmentVerizon Stock: Shares Getting Cheap as Berkshire Hathaway Sells

Verizon Stock: Shares Getting Cheap as Berkshire Hathaway Sells

Shares of American telecom behemoth Verizon (VZ) have been on a steady downward trend for well over a year now. With a lack of capital gains to show over the past few years, it’s not a mystery why Warren Buffett’s Berkshire Hathaway (BRK.A)(BRK.B) nearly eliminated its sizable stake in the firm.

Undoubtedly, Verizon stock has its considerable 5.2% dividend yield going for it. And the stock has become much cheaper after yet another year of lackluster performance. At 9.6 times trailing earnings, the telecom titan stands out as a cheap dividend stock to ride out the tough market tides.

Though the company has more than its fair share of challenges, I remain bullish on the stock, even as Berkshire folds. With the fading health of the economy, it could be difficult for Verizon to recover during a bear market. Still, I think patience will ultimately be rewarded, given the low price of admission and generous payout that’s still poised to grow over time.

Why Would Berkshire Hathaway Throw in the Towel on Verizon Stock?

Whenever Berkshire or Buffett sells a stock, Wall Street is bound to take notice. Undoubtedly, it was quite discouraging to learn that Berkshire had dumped nearly all of its $8.3 billion stake in shares of Verizon. After all, it was a surprise, especially considering shares have only become cheaper over the past few quarters.

Indeed, Verizon is still one of the cheapest ways to play the 5G boom. However, the economy is at risk of falling into a recession. Telecom firms that can stand to take a big hit could see consumer spending fall into the gutter.

In the first quarter, management noted a wireless growth slowdown in March. Undoubtedly, we’ve witnessed some pretty mixed earnings results this season. If the recent cooling of wireless growth is just the start of a trend, things could get much uglier for Verizon stock.

For now, management is erring on the side of caution. The Federal Reserve is fighting high inflation with a double-dose of rate hikes. The implications on the economy could be dire. Though Verizon’s economic sensitivity makes it a brutal hold as recession risks rise, I think the valuation has baked in some probability of a rocky (as opposed to soft) landing induced by the Fed.

Undoubtedly, the bleak outlook alone may be enough of a reason to justify hitting the sell button on the stock. Though the real reason Berkshire sold remains a mystery, I do think recent trends are incredibly discouraging.

Even with the bleaker economic outlook taken out of the equation, the telecom scene has seen competitive pressures mount in recent years. Undoubtedly, Verizon’s superior network has helped it retain market share over the years. But the competition is catching up with such players as AT&T (T), which is now fully focused on telecom after spinning off its media business.

I think AT&T could evolve to become a more fierce threat over the coming years as it looks to invest in infrastructure to make up for lost time. Undoubtedly, the telecom space is highly competitive, and it could become that much more competitive over time, ultimately weighing heavily on margins.

Verizon Capex Spending Remains Elevated

Capex is expected to come in at $21.5 billion this year as Verizon continues pouring money into 5G. Though 5G infrastructure has come a long way in recent years, it’s clear that there’s still a lot of room for improvement.

Work on the company’s recently-acquired C-band spectrum is ahead of schedule and should give 5G wireless a nice boost. Though capex is at a high point, the nature of the telecom industry implies spending could remain elevated over the long haul. With interest rates on the rise, such heavy spenders are bound to take a bit of a hit.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, VZ stock comes in as a Hold. Out of seven analyst ratings, there are two Buy recommendations, four Hold recommendations and one Sell recommendation.

The average Verizon price target is $55.20, implying an upside of 11.13%. Analyst price targets range from a low of $44.00 per share to a high of $64.00 per share.

The Bottom Line on Verizon Stock

It’s never a good idea to follow a single investor or firm into or out of a stock, even Warren Buffett. Still, Verizon faces considerable challenges as it looks to retain market share in a more competitive environment that calls for higher spending. Add the rising risk of a recession into the equation, it seems like it’s going to be a tough, uphill battle for Verizon from here.

After another year of meager performance, the stock has likely baked in many negatives. The real upside could come if we are bound for a softer-than-expected landing as the Fed looks to avert a severe downturn.

Discover new investment ideas with data you can trust.

Read full Disclaimer & Disclosure



Please enter your comment!
Please enter your name here

Most Popular

Recent Comments