Dear Mr. Berko:
I bought 100 shares of Verizon in October 2008 for my individual retirement account because I had the spare cash and because I was a Verizon Wireless customer. I’m not a Verizon customer today (the company’s customer service and automated answering system are the pits), but I still own the stock. I now have almost $5,000 in IRA cash. Would you recommend that I buy 100 more Verizon shares?
C.D., Cedar Falls, Iowa
Verizon Communications Inc. (VZ-$53.31) is the result of the merger of Bell Atlantic (a divestiture from AT&T in December 1983) with GTE in June 2000. That year, Verizon (the new company) traded in the high $50s, produced about $61 billion in revenue, earned $2.92 a share and paid a $1.54 dividend, yielding 2.5 percent. Today, after acquiring MCI in 2006 and Alltel in 2009, VZ expects revenues of $121 billion, earnings of $2.75 a share and to pay a $2.06 dividend, yielding 3.9 percent. However, I’m a bit put off by VZ’s absurdly high price-earnings ratio of 19-to-1, compared with the Dow Jones industrial average’s P/E, which is 13.5-to-1.
But I wish I’d been smart enough to buy VZ at $24 instead of AT&T at $24 in late 2008, when the Dow took a swan dive. On paper, AT&T Inc. (T-$37.63) seems to be a bigger and better company, with higher revenues, superior net profit margins and a much better dividend record. However, the proof is always in the pudding, and today VZ trades at $53.31, which is a lot higher than T’s $37.63.
Lots of folks don’t like Verizon for the same reason you mentioned. Its customer assistance call center is staffed by stupids who speak with marbles in their mouths and by Biff Burger rejects. But VZ’s cellphone service is gratifyingly excellent. VZ also has a superb landline business, and its new next-generation network provides impressively fast data speeds, plus easy “upgradability,” to 17 million users. And VZ’s cellphone business (Vodafone Group owns 45 percent of Verizon Wireless), with 94 million subscribers and growing by a couple million subscribers a year, has the best customer loyalty in the industry – even with its low-quality customer service.
VZ has a fine balance sheet, a strong cash flow of more than $8 a share and a well-covered, superb dividend, which I believe will be increased this year. This pale-blue-chip issue is best-suited for income investors who are willing to accept lackluster principal growth over the coming years. But don’t buy the stock.
Rather than purchase another 100 shares of VZ, I think you might enjoy better dividend and principal growth if you purchased 200 shares of Nippon Telegraph and Telephone Corp. (NTT-$27.13). NTT has a 3.6 percent dividend, a superior dividend growth record and a better balance sheet. NTT also has $14 billion in the bank, a $43 per share book value – compared with VZ’s $5 book value – and four times more cash per share than VZ. On the income side, both NTT and VZ have fairly equal net profit margins. Both companies employ about the same number of people, though NTT’s revenues are about $20 billion higher than VZ’s.
But there’s an interesting kicker here to be considered, and that’s Japanese Prime Minister Shinzo Abe’s new economic policy. Abe and Haruhiko Kuroda (Japan’s equivalent to our Santa Claus, Ben Bernanke) recently initiated a quick fix to the Japanese economy.
So, imitating U.S. Santa Claus Ben, Kuroda just started dumping $70 billion a month of electronically created money into the Japanese banking system. And considering that the Japanese economy is only one-third the size of the U.S. economy, Kuroda’s $70 billion a month (Santa Claus Ben is dumping $85 billion a month) may have a nuclear effect that could compel the performance of the Nikkei to be higher and faster than the Dow’s performance the past two years. And I think NTT, with its excellent dividend, is likely to participate very nicely.