Verizon (VZ) shares traded Thursday following news that Warren Buffett’s Berkshire Hathaway (BRK.A) shed its position in the communications company as it cut some other underperforming stocks. If you’re a long-term investor in Verizon stock, as Buffett was, the stock is down more than 22% since peaking near $57 in late 2020. Odds are Buffett is wondering if VZ stock can follow that run , and if so how long will it take. Depending on the answer, this could mean a lost opportunity for the Oracle of Omaha.
Let’s ask the above question a little differently.
Do we see VZ stock pull back and break above the $57 level?
The short answer is yes, it probably is, given our $55 price target, but given the move lower in the Wall Street consensus price target to $50 from $57 earlier this year, chances are Buffett thinks that it would be better to cut the loss and move to Na.
Of course, there will be some haters piling up, with some even wanting to compare Verizon to AT&T (T), but while the two offer competing services, their balance sheets tell a very different story. Coming out of the June quarter, AT&T’s debt coverage, as measured by earnings before interest, taxes, depreciation and amortization/interest expense, was 6.9 times, while Verizon’s ratio was 15.1 times. Another criticism points to AT&T’s recent dividend cut to $0.2775 per share per quarter from $0.52.
Earlier this month, Verizon paid its most recent quarterly dividend of $0.64, marking the fourth such payment. Members are reminded that Verizon has increased its dividend for the past 15 years, which includes not only the Great Recession but also the pandemic. Given its earnings outlook and dividend payout ratio near 50%, chances are high the company will announce an increase in its quarterly dividend in the final month of the current quarter. For the past few years, this announcement has come in the first few days of September. Even a modest increase would add to the 5.6% dividend yield currently offered by the stock, and that would likely attract the attention of investors looking for more defensive plays if the economy continues to slow.
We’ve watched the wireless business long enough to know that Verizon and AT&T have long cycles. In this case, the down cycle may be a little longer than expected, as the previous up cycle was longer, literally without a break since 2020. So while the stock turned down and is now testing a long-term support area at 100- monthly moving average, we should see this stock settle down – this is the first time since 2010 that the stock has visited this moving average – and eventually make a rally. We will be patient and continue to get a decent dividend yield of better than 5% while we wait.
The portfolio has a small position in VZ stock and to maintain one of our strategies we tend to add to it on pullbacks. It’s something we’d consider, especially since the stock bottomed out at an average dividend yield of 5.1%, implying a price per share of $51.