I’ve been waiting for a couple weeks for Verizon to dip below $30 again (and therefore to get a nice 6% yield again), and it happened today on the JP Morgan downgrade of both AT&T (T) and Verizon (VZ) — so I opened a position at $29.58.
Telecom companies generally are perceived as defensive holdings, and in some ways that’s true for Verizon as well, but it seems remarkable to me that you can buy a company with this kind of cash-producing asset (their national phone and data networks, including the high-demand FiOS rollout, plus half of Verizon Wireless), for just about 3 times cash flow.
There are problems, no doubt — it’s a capital intensive business with a lot of debt, and their revenue growth may well reverse for a brief while if the economy continues to suffer, but electronic communications networks are not going to be less important in 2010 than they are in 2009, and Verizon arguable has the best one.
I also thought about buying AT&T, since I consider that a strong bet, too, but I think Verizon is a bit sturdier and has better long-term growth potential and is a bit cheaper based on cash flow — AT&T has enjoyed some strong growth from the iPhone recently, and the rumblings about Apple ending the exlusive relationship when it expires next year have put some pressure on T, too. I don’t expect to see a Verizon iPhone, but Verizon Wireless seems to have done extremely well while rarely having the “hot” phone first.
Things can always change, of course, but my expectation is that this will be a good time to enter the stock and start compounding those nice dividend payments from a low base — with the hope that they will, as they have for at least 25 years, continue to slowly raise that dividend. I plan to be patient with Verizon unless something dramatically changes my opinion of the business.