Warren Buffett Sold All of His Verizon Shares. Should You?

Warren Buffett once said, “The most important thing to do if you find yourself in a hole is to stop digging.” That’s precisely what he did with his position in Verizon (VZ 0.18%).

Warren Buffett, through Berkshire Hathaway (BRK.A 1.49%) (BRK.B 1.34%), owns many stocks. However, one stock he and the company no longer owns is Verizon. After initiating a position in Verizon in the fourth quarter of 2020, the Oracle of Omaha has completely sold his $70 million position in the telecom giant.  

This sell-off is a continuation of a process initiated in the first quarter, as this position was worth just under $8.4 billion before the selling began. However, after purchasing 159 million shares in early 2021 and late 2020 for around $59 per share and then selling for about $53, this position lost Berkshire money — even when dividends are added in.

Should investors follow Buffett’s move and get out of the stock? Or is there an upside ahead for Verizon? Let’s dig in.

Verizon’s guidance reduction is troublesome

One of the likely reasons Buffett has sold out of Verizon stock is poor results. In Q1, revenue grew by a mere 2.1% year over year, but earnings per share (EPS) fell by 0.7% to $1.35. Second-quarter results weren’t any better, with revenue barely squeaking out a greater value with 0.1% year-over-year growth and EPS falling 5.8%.

Verizon is a mature business and is unlikely to be the next high-growth tech stock, so anyone examining the stock (including me) needs to temper his or her expectations. That’s also what Verizon told shareholders to do when it slashed the remainder of its 2022 guidance. So instead of the $5.40 to $5.55 EPS investors were expecting, Verizon reduced that range to $5.10 to $5.25. Pundits might argue that that reduction only represents a 5.5% guide down. But with Verizon, a 5.5% guide down is a significant drop.

But most investors aren’t concerned with Verizon’s growth; they just want to know if the dividend is safe.

How safe is Verizon’s rather generous dividend?

One of the most attractive parts of Verizon’s stock is its 5.79% dividend yield. However, most investment advice warns against taking positions in a stock that gets above a 6% yield, and Verizon is quickly approaching this number, thanks largely to a falling stock price.

However, the payout ratio (the percentage of earnings a company pays its shareholders in dividends) is well in line with historical norms.

VZ Payout Ratio data by YCharts.

Furthermore, a conservative payout ratio of 51% is far from the threshold many investors would consider unsustainable (investors start to really worry when it elevates to around 75% to 80%). Still, with Verizon decreasing its earnings guidance, the payout ratio may increase slightly, but probably not enough to raise any alarm.

Verizon’s dividend is safe for the time being, so investors shouldn’t dump the stock on that account.

Additionally, Verizon trades at about 10 times earnings, so it’s also a cheap stock. Could there be another reason investors like Buffett are dumping the stock?

Are rising interest rates the culprit?

When Buffett initiated his position in late 2020, interest rates were essentially 0%. So, the only way to make any interest income was to buy a dividend-paying stock, like Verizon. As interest rates began to rise, Verizon’s stock price began to fall.

VZ data by YCharts.

This is likely the primary culprit for Verizon’s stock’s woes. Buffett saw the rising rates and knew investors would soon have other options for generating income that didn’t include dealing with a shrinking stock price.

Still, with a regular index fund paying a small dividend (1.59% for the S&P 500 currently) and most companies in that index growing much faster than Verizon, I’d be more prone to purchase that than Verizon stock. Over time, Verizon’s dividend can add up, but the business stagnation also worries me.

I don’t think investors should sell Verizon’s stock outright, but they need to understand that if Verizon’s business can’t produce meaningful growth, its dividend will have a hard time growing either.

Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares). The Motley Fool recommends Verizon Communications and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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