Verizon Communications Inc.—The One Stock the Brexit Forgot
Friday was a sea of red on Wall Street with stocks getting hammered after Britain voted to leave the European Union (EU). Despite the broad-based global sell-off, investors sought the safety of stocks in the world’s biggest and safest economy. More specifically, investors sought safety in Verizon Communications Inc. (NYSE:VZ), a technology stock with excellent momentum that not even the Brexit could derail.
Verizon Hits All-Time High on Brexit Woes
Nigel Farage, the leader of the Independence Party in the U.K. (UKIP), said June 23 should go down in U.K. history as “Independence Day.” He added that it was a “victory for ordinary, decent people, a victory against the big merchant banks.” (Source: “Nigel Farage says Leave win marks UK ‘independence day’,” BBC, June 24, 2016.)
Maybe it will, but who can say? What it will be remembered for, though, is how the Brexit vote decimated global markets, wiping out $2.0 trillion in value. In London, stock market panic wiped $170 billion off the value of U.K. companies in just 10 minutes after the Brexit decision. The FTSE 100 closed four percent lower with fears of a Brexit recession not so farfetched—as well as fears of a global domino effect.
Here in the U.S., stocks plunged, opening sharply lower. The Dow Jones Industrial Average fell 520 points, the S&P was down 2.6%, and the technology-heavy NASDAQ shed 3.6% at open.
While most investors ran toward government bonds and safe haven precious metals like gold and silver, many international investors sought shelter in U.S. tech stocks—but not all technology stocks. Stalwarts like Alphabet were down four percent, Facebook was down three percent, Amazon declined 3.5%, and Netflix fell 3.2%.
Verizon Communications, though, continued its bullish ways, hitting a new 52-week high of $55.22. Verizon has easily been one of the best-performing technology stocks in 2016, up 22.5% since the start of 2016 and 7.5% since the start of June.
Chart courtesy of www.StockCharts.com
In addition to rewarding investors with strong capital gains, Verizon also provides a frothy 4.3% annual dividend ($2.26 per share), which it has raised for the last 11 consecutive years.
Solid Q1 Results and Thumbs-Up from Berkshire
On April 21, Verizon announced that total operating revenue increased 0.6% in the first quarter to $32.2 billion. Revenue from new revenue streams (“Internet of Things”) climbed 25% year-over-year to $195 million. First-quarter net income was up 2.1% at $4.4 billion, or $1.06 per share. (Source: “Verizon delivers continued earnings and operational growth in 1Q,” Verizon Communications Inc., April 21, 2016.)
Cash flows from operating activities came in at $7.4 billion in the first quarter of 2016. In the first quarter of 2015, cash flows from operating activities were $10.2 billion and included $2.4 billion related to a one-time transaction to monetize wireless tower assets.
With capital expenditures totaling $3.4 billion in first quarter 2016, free cash flow totaled $4.0 billion. The company paid out $2.3 billion in dividends. That puts the company’s free cash flow payout ratio at 57.5%. Verizon expects to report consolidated capital expenditures of between $17.2 billion and $17.7 billion in 2016.
The company reaffirmed its full-year 2016 adjusted earnings to be at a level comparable to the company’s strong full-year 2015 adjusted earnings. That said, given the status of labor contract negotiations, the company warned there will be pressure on second-quarter earnings due to the timing of cost reductions.
Verizon’s share price has been trending steadily higher since May 24, when it was announced that Lowell McAdam, chairman and CEO, spoke at the J.P. Morgan Global Technology, Media, and Telecom Conference in Boston.
If that didn’t grab investors’ attention, maybe it was the fact that it was also announced that Berkshire Hathaway increased its holdings in Verizon by more than 11 million shares (worth $528.7 million) in the first quarter. The first-quarter purchase brings Berkshire’s total holdings to 15 million shares in the company. (Source: “Verizon Stock after Berkshire Hathaway Increased Its Holdings,” Yahoo! Finance, May 25, 2016.)
With a strong balance sheet, heady dividend, strong outlook, momentum, and the thumbs-up from Warren Buffett, Verizon remains one of the best tech stocks out there—whether Britain remains in the EU or not.
