What do Warren Buffett, John Paulson, and Daniel Loeb have in common?
Well, yes, they are all really, really, really rich. Fair point.
But they are all also buying Verizon Communications (VZ 1.35%), according to required regulatory disclosures this week. The news has the stock trading higher by nearly 2.5% on Friday.
If these giants of the investing world are buying, should you?
First of all, how much buying are we talking about?
Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) bought a stake worth about $524 million as of March 31. An investment of this size likely means that the investment was made not by the Oracle of Omaha himself, but more likely one of his lieutenants, Ted Weschler or Todd Combs.
John Paulson disclosed a new position of about $416 million. Loeb's fund, Third Point LLC, bought about $166 million of Verizon stock.
Verizon, as of Friday morning, has a market cap of $203 billion. All combined, the Berkshire, Third Point, and Paulson positions represent somewhere around 0.5% of the company.
Why are they buying?
Verizon's fundamentals are pretty fantastic. The company's financials are stable, marked by slow, steady growth and loads of cash flow. It's this cash flow that supports the second largest dividend on the Dow at 4.4%.
Verizon currently trades at about 11 times trailing twelve month earnings, according to Yahoo! Finance. Verizon's largest competitor, AT&T (T 0.59%) trades at 10.7 times trailing twelve month earnings.
Speaking of AT&T
Earlier, I mentioned that Verizon has the second largest dividend on the Dow.
Who is #1?
That's right, AT&T.
AT&T currently has a dividend yield of 5.4%, and overall has a similar profile to Verizon. The company is huge, stable, slowly growing, and throwing off so, so much cash. On the surface, the companies really are very similar.
So what's the difference between AT&T and Verizon? Why are Paulson, Loeb, and Berkshire Hathaway all buying Verizon but not AT&T?
The truth is impossible to say. Perhaps one or all of these investors will speak publicly about their logic. But short of that, we're all just guessing.
My opinion -- Verizon over AT&T
To me, the decision to buy Verizon over AT&T boils down to a two factors--one negative for AT&T and one positive for Verizon.
AT&T may not see the forest from the trees
Over the past six months, AT&T has been in a price war with smaller rival T-Mobile. The company won't admit this is happening, but a quick search will yield hundreds of articles detailing the subtle changes in AT&T's basic wireless plans targeted directly at T-Mobile.
Price wars, while potentially beneficial for the winner in the long term, can really hurt an organization's bottom line in the interim. And the benefits only really accrue if the company wins the war.
AT&T CFO John Stevens said of T-Mobile, "The competition is more noisey than disruptive."
That may be true, but the competition seems to have AT&T distracted at best, and more likely engaged in a price war despite the corporate public relations spin.
As an investor, I don't want my top executives squabbling semantics with an non-threatening, small competitor. I want them to be ruthlessly focused on the future, on executing, on out innovating the competition.
AT&T seems reactive. The best companies are not reactive, they are proactive.
Consumers simply prefer Verizon
In the world of wireless telecoms, consumer opinion matters. It shapes perception, and it dictates buying decisions. If I come into a decision with a predisposition that option A is better than option B, I'm much more likely to just go with option A.
This is a huge advantage for Verizon, and a real problem for AT&T. Think back just a few years ago when the iPhone was exclusively available on AT&T's network. Do you remember the slow data? The dropped calls? The lost signals inside buildings?
I remember, and so do consumers across the nation. The experience still lingers in the collective conscious. In a Consumer Reports survey late last year, consumer said that Verizon is far and away the favored carrier among the largest U.S. providers.
Verizon scored 71 points out of 100. That compares to 64 for AT&T and 65 for T-Mobile. Sprint was last with a score of 59.
In other words, AT&T scored closer to last place than it did to first place Verizon.
So, should you be buying?
To me, Verizon makes sense as a buy. The company trades at just 11 times earnings, it's a cash flow and profit machine, and its 4.4% dividend yield is pretty awesome.
I also like that Verizon is the perennial top pick for consumers when evaluating the quality of the wireless network. Consumers buy what they perceive as the best option; today that option is Verizon.
The world is going mobile driven by smartphones and tablets, and the future of telecom is wireless, high speed broadband. From a big picture perspective, Verizon is positioned perfectly to profit from this transformation.
From the micro perspective to the macro perspective, Verizon makes a lot of sense. Its no wonder that Berkshire, Paulson, and Loeb are all buying.
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