Warren Buffett Has a Gem in This Dividend-Paying Giant

What should investors think about Warren Buffett's recent purchase?

Aug 17, 2014 at 11:00AM


Those who follow Warren Buffett are well aware of his aversion to technology companies. Outside of IBM, and more recently VeriSign, he has typically steered clear of technology investments. However, it was reported in May that his company Berkshire Hathaway had bought approximately 11 million shares of Verizon Communications (NYSE:VZ). While on the surface there are reasons to be concerned about the telecom giant, shrewd value and income investors should seriously consider following "The Oracle" into this investment.

But that debt...
Admittedly, Verizon's debt gives investors reason to pause. As of its most recent filing, Verizon's long-term debt-to-equity ratio was an astounding seven times. Coming off the largest debt offering ever, which saw the company place nearly $50 billion in paper, Verizon now appears to be in a much riskier position as far as its balance sheet is concerned.

But debt used correctly can be beneficial for shareholders. The reason for this large debt issuance was Verizon Communications' acquisition of the crown jewel of its business: Verizon Wireless. Verizon Wireless had been a jointly owned entity, with Verizon owning 55% and Vodafone owning the other 45%. What initially started as a friendly joint agreement in the early 2000's quickly became a detriment to Verizon shareholders amid the huge growth in wireless telecommunications.

Verizon took out the loan (and also issued shares) in order to fund a $130 billion buyout of Vodafone's stake of the wireless unit. The money was not excessively expensive in this low-rate environment: The bundle of notes ranged from a three-year note priced at 2.5% to a 30-year note priced at 6.55%.

What investors should keep an eye on
Does debt make the equity investment riskier? Sure--now Verizon has to pay new debt holders before that money can float down to the income statement as shareholder earnings. This requires continued strong operations from its newly fully acquired wireless segment. That might be easier said than done--while Verizon Wireless is the largest carrier in the United States, but it must watch the competition. A particularly pesky rival has been John Legere's reinvigorated T-Mobile (NASDAQ:TMUS).

Through its "Un-carrier" initiatives, T-Mobile is shaking things up. In addition to growing subscriptions (commonly referred to in the industry as subs), T-Mobile is forcing other carriers to present better deals to customers. And in this rather specific example, there is a direct and negative correlation between customers and shareholders. As average revenue per account goes down, less money is available for both debt holders and then shareholders. How has Verizon Wireless held up recently?


Source: Verizon.

In the scheme of things, Verizon's retail postpaid subscriber accounts -- the Holy Grail of smartphone revenue drivers -- are holding up well. The average revenue per account has risen on the back of more lines being added to accounts. It is something to watch as T-Mobile continues to hammer the entrenched duopoly of AT&T and Verizon, but not anything to be overly concerned with right now.

Another important figure is churn rate -- the percentage of subscribers who discontinue their service during a particular period. For what it's worth, on a seasonally adjusted basis, Verizon appears to be remarkably stable in the mid-0.90% range -- although it does typically jump above 1% in Verizon's first quarter due to seasonality issues. While this is also something Verizon investors should be aware of, at the moment the company is handling competition well.

Final thoughts
Warren Buffett is one of the shrewdest investors alive. He's made himself a billionaire and many early investors millionaires many times over. So when he focuses his attention on an investment it's a good idea for you to pay attention as well. What he sees in Verizon is a reinvented company of sorts that increased its net income on a year-over-year basis in the latest quarter by 87%; even with recent share dilution, EPS increased by nearly 30%.

On top of that you have the classic signs of a value play, a price-to-earnings ratio under 11 on a trailing-12-month basis, and an excellent yield of 4.3% in this yield-starved environment. Buffett once said "[i]t's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." But when you can buy a wonderful company at a wonderful price, it's time to take notice.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Editor's Note: Verizon's P/E ratio was incorrectly referred to as the P/S ratio in a previous version of this article. The Fool regrets the error.

Jamal Carnette owns Verizon Communications. The Motley Fool recommends Apple and Berkshire Hathaway. The Motley Fool owns shares of Apple, Berkshire Hathaway, and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers