Investment Alert: Buy Verizon (VZ) Under $38/share
Disclaimer: Investment Alerts have a medium to long-term time horizon. These do not constitute financial advice and you should contact a financial advisor before deciding whether it is appropriate for your individual circumstances.
If you were to google Warren Buffett’s portfolio, you would find his publicly disclosed holdings from 13F filings, but his firm Berkshire has other holdings thanks to its purchase of General Re in 1998. As part of that deal, Buffett acquired New England Asset Management, an investment firm that oversees $5 billion but isn’t managed by Buffett or Munger.
Last quarter, one of the stocks acquired by New England Asset Management was the well-known communications enterprise, Verizon. And upon closer inspection, it’s easy to see why.
- New England Asset Management sold a number of stocks last quarter, including US Bancorp, IEUR, and Apple.
- Verizon was one of the stocks that New England Asset Management bought.
- The primary reason to buy VZ is its high dividend yield, which is a form of protection against losses.
Before diving into the thesis behind Verizon, it’s worth noting that New England Asset Management dumped a whole host of stock last quarter. US Bancorp was unceremoniously discarded to the tune of almost 15,000,000 shares, a 90% reduction in its holdings. So too was exposure to Europe via IEUR sold. And a position in Apple was trimmed too.
If the #1 holding in the portfolio, Apple, was sold, why did Verizon deserve a spot?
The most compelling and obvious reason is the enormous dividend paid by Verizon right now. It sits at around 7%, has a growth streak of 18 years, and a payout ratio of 50%, suggesting it’s probably sustainable.
At a time when markets remain under pressure from higher interest rates and spiraling inflation, Verizon is somewhat of a safe-haven holding.
It appears the the economic tides have changed to favor Verizon now. While the S&P 500 rose by 53% over the last 5 years, Verizon share price declined by 20%. That relative underperformance is stunning. But eventually a stock underperforms to such an extent that it becomes a compelling value play, and that seems to be the case for Verizon.
We ran the numbers for Verizon using a discounted cash flow forecast analysis and arrived at fair value of $45 per share. That would translate to approximately 20% upside from current levels.
Verizon: Time to Buy?
The way to think about the New England Asset Management purchase is a 7% yield essentially returns the full principal spend in 14 years. Or another way of expressing that is if the share price stayed the same for the next 14 years, an investor would double their money thanks to dividends.
Add a compelling valuation thesis to the mix, and you end up with 20% upside on top of 7% annually.
The high dividend yield essentially acts as put protection for a buyer too. If the share price drops 7% this year and 7% next year, the investor is no worse off thanks to the 7% annual dividends.
So you can view risk as diminishing over time as the breakeven level before falling into the red drops with each quarterly dividend payment.