Could a Workers’ Strike Crimp Verizon Stock?
Nearly 40,000 Verizon Communications Inc. (NYSE:VZ) workers went on strike on Wednesday in the eastern United States, as negotiations to renew their employment contract hit a roadblock. Workers have been without a contract since August 2015. The talks stalled over health care, jobs in call centers overseas, work rules, and pension plans. Verizon stock predictably dropped but not significantly. VZ stock fell 1.3% to touch $51.26 on Wednesday afternoon, well within the trading range seen in early March.
Still, investors cannot simply dismiss the strike; it is one of the most visible of the past few years. Should it last more than a few days, Verizon stock could endure much deeper losses. After all, the striking workers, represented by two unions, include customer service providers and network technicians. Both are essential to running a network. A prolonged strike, therefore, may result in customers leaving in droves. In theory, this would have VZ stock sinking.
Nevertheless, that does not necessarily have to be the case. A vitriol-filled strike at one of Canada’s major telecoms, TELUS Corporation (NYSE:TU), in 2005 had the opposite effect. The striking workers, which included customer service staff, and management failed to reach an agreement for weeks. Meanwhile, Telus stock was rising, even after four weeks. Indeed, Telus stock rose some 11% after almost a month of labor action. (Source: “Telus Strike Action,” Canadian Business, August 15, 2005.)
Of course, situations are different and Telus was enjoying a strong reputation and earnings at the time of the strike. This contributed strongly to investors maintaining bullish conditions. Moreover, in such situations, management often takes over the customer service positions in order to keep the company moving.
One key component of the Verizon strike, urging investors to exercise patience before they pull the sell trigger on VZ stock, is that the action does not concern wireless services much more than the company’s landline and FiOS business. (Source: “36,000 Verizon workers go on strike,” CNN, April 13, 2016.)
Most importantly, Verizon had already planned for contingencies to deal with the strike. The company hired thousands of non-union employees during the past year to ensure that customers do not endure service interruptions. (Source: Ibid.) These workers may lack experience, but the striking workers have less bite.
While some service disruptions are inevitable, Verizon has the stronger hand. Verizon’s wireless business has grown considerably and the wireline business has actually shrunk. Indeed, while it maintains a significant wireline business in much of the strike-affected northeast, it has sold similar assets in California, Florida, and Texas. (Source: “How the Verizon Strike could affect you,” The New York Times, April 13, 2016.) Not surprisingly, Verizon’s current avenue for expansion is a bid to acquire Yahoo! Inc.
In Verizon’s key business, customers are brand-loyal. Alternatively, they are simply lazy, too lazy to switch service providers. Still, strikes are unpredictable, especially those that involve some 40,000 or more workers. Moreover, Verizon shareholders, while there is no reason to panic, should remain vigilant. Twenty U.S. senators were concerned enough to write a letter to Verizon’s CEO, asking him to reach a fair settlement with the workers. (Source: “Verizon Communications Inc.: Verizon stock threatened by nearly 40,000 workers on strike,” InvestorPlace.com, April 13, 2016.)
If you’re still not convinced of Verizon stock’s strength—it has gained 12.4% since the start of the year—consider Verizon’s dividend, which as of April 12, was yielding four percent. Verizon has shown superior margins and risen through acquisitions such as AOL. This has enabled it to build a digital platform, exploiting paid video for mobile users, monetized through advertising.