Verizon, Interest Rates and the Value Mindset
- By Steven Orlowski
Some commentators think Verizon should be avoided. Accordingly, the stock price has been both volatile and stagnant. But that is where the opportunity is, and where fleet-footed value investors might want to dig in and build a position, or increase an existing one. Verizon may present an opportunity for long-term value investors as short-sighted, short-term investors bail out in pursuit of flavor-of-the-day profits.
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The intrinsic value of VZ
Verizon Communications (VZ) is down a bit this year, about 2% or so for 2018. But despite that and the volatile 2017 behind it, the stock price is nearly unchanged from 12 months ago. And that is just fine. The volatility might continue but the stock should not be ignored or disposed of, except perhaps by the momentum traders. For value investors, it's looking good and might get even more inviting.
Some of last year's volatility is attributable to well-known and addressed problems like the ground Verizon previously lost in its wireless business versus competitors like T-Mobile and AT&T. Those companies gained a bit on Verizon by upgrading their wireless networks and by improving the network speed and reliability. Verizon also set itself back a bit by arriving late to the to the "unlimited plans" party and therefore needing to play catch-up.
But despite these items the company is still doing well and Verizon's leadership appears to be taking appropriate corrective action in the wake the missteps. The stock price is not yet fully reflecting the positive impact of these measures, and that too is OK. The company reported improvements in postpaid phone subscribership in the most recent two quarters with 358,000 and 274,000 in the second and third quarters, respectively, improvements which underscore the fact that Verizon is again winning business away from its competitors.
Other areas of improvement for Verizon come in the form of cost cutting ($10 billion from its budget between now and 2021), its still prominent wireless position (a 36% share of the subscription market) and its opportunity to grow that business with its new 5G technologies. Verizon appears set to roll out its fixed 5G broadband connections next year. This is good news with the company expecting to replicate the success it had with its earlier 4G and LTE rollouts with the new broadband 5G offering.
For value investors, considering Verizon's core business, its adaptability, its progress at the forefront of the next evolution of wireless, its 4.55% dividend yield, and its strong balance sheet, and you might ask, "What's the problem?"
The answer, for others, is interest rates. Some analysts are predicting the stock will get dumped because of higher interest rates. It and other dividend stocks like it are expected to lose share value as interest rates rise and bonds and other debt and dividend-paying stocks get sold off.
And this is where investors need to check their heads and remain steadfast in their investing strategy. True, debt gets dumped as rates rise. It's simple. Money goes where the highest yield is available for the least amount of risk. Fixed rate debt gets sold as new issue debt is introduced at higher interest rates and longer maturities. Knowing this truism compels investors, especially institutional ones, to act in advance of the occurrence, in effect often creating a self-fulfilling prophecy. But dividend stocks, and value stocks, are not debt. And the philosophy behind investing in them is different.
For one thing, there is no guarantee on a stock dividend. But there also is no fixed rate. A dividend can be lowered and it can be increased. A company can raise its dividend to make the stock more attractive to help maintain and increase its share price. Bonds have set rates that never change. This makes them easier to value against current interest rates and other securities and clarifies the potential benefit of owning the bond.
Verizon is not a bond. It is a good company with a strong dividend. It probably is worth more, like the analyst who recently downgraded the stock from a buy to a neutral yet raised the price target by 8% indicated, but it will also likely experience volatility soon, and that means the price may go down before it goes up. And that's OK. That's why iy pays a dividend.
Verizon is a stock to own and hold. It is a stock to enjoy the dividend while the price fluctuates. And it is a stock to expect more good things from in 2018 and beyond.
Disclosure: The author owns none of the stocks discussed in this article.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 5 Warning Sign with VZ. Click here to check it out.
The intrinsic value of VZ
