Buffett Bucked This Stock, But We’re Not Backing Out

Verizon (VZ)  shares are trading off Thursday following the news that Warren Buffett’s Berkshire Hathaway (BRK.A) shed its position in the communications company, as its trimmed some other underperforming stocks. If you’re a longer-term investor in the shares of Verizon, like Buffett has been, the shares have fallen more than 22% since peaking near $57 in late 2020. Odds are Buffett is asking himself whether VZ shares can retrace that move, and if so how long will it take. Depending on the answer, it could mean lost opportunity for the Oracle of Omaha.

Let’s ask the above question somewhat differently.

Do we see VZ shares retracing and moving past the $57 level?

The short answer is yes, it’s likely, given our $55 price target, but given the move lower in the Wall Street consensus price target to $50 from $57 earlier this year, odds are Buffett is thinking it would be better to cut the loss and move on.

There of course will be some haters that pile on, with some even looking to compare Verizon to AT&T (T) , but while the two offer competing services their balance sheets tell a very different story. Exiting the June quarter, AT&T’s debt coverage as viewed through earnings before interest, taxes, depreciation, and amortization/interest expense was 6.9-times, while that ratio at Verizon 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 latest $0.64 quarterly dividend, which marked the fourth such payment. We’d remind members Verizon has been increasing its dividend for the last 15 years, which includes not only the Great Recession but also the pandemic. Given its earnings prospects and with its dividend payout ratio near 50%, odds are high the company announces a boost to its quarterly dividend during final month of the current quarter. Over the last few years, that announcement has come during the first several days of September. Even a modest increase would inch up the 5.6% dividend yield currently offered by the shares, and that is likely to catch the eye of investors looking for more defensive plays should the economy continue to slow.

We have watched the wireless business long enough to know Verizon and AT&T have long cycles. In this case, the cycle down may be a bit longer than expected, because the previous up cycle was longer, literally uninterrupted from 2020. So, while the stock has turned down and is now testing a long-term support area at the 100-month moving average, we should see this stock settle down — it’s the first time since 2010 the stock has visited that moving average — and eventually make a run higher. We’ll be patient and continue to get paid a handsome dividend yield better than 5% while waiting.

The portfolio has a small position in VZ shares, and in keeping one of our strategies, we’re inclined to add to it on pullbacks. That’s something we’d consider, especially since the shares have bottomed out at an average dividend yield of 5.1%, which implies a $51 share price.