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Why Verizon Communications Makes a Part of Warren Buffett’s Portfolio

Verizon shares some similarities with other stocks owned by Buffett

Dallas, TX, United States, 11/01/2021 / Top Wire News /

Verizon Communications: $8.4 billion

“The newest big investment from Warren Buffett is telecom stock Verizon (NYSE:VZ). The Oracle of Omaha and his team acquired nearly $9 billion worth of Verizon shares in the first and second quarters of 2021.

On one hand, there’s a good likelihood that Verizon will benefit from the rollout of 5G wireless infrastructure. Though its high-growth days are long gone, Verizon should benefit from increased data consumption as more consumers and businesses upgrade their devices. Since data is the company’s key margin driver, the profitability arrow is pointing higher.

On the other hand, the real lure for Buffett and his team might be Verizon’s rock-solid 4.8% yield. With inflation rising and bond yields still near historic lows, a dividend stock like Verizon is a smart and safe way to generate income.” Source 

A new position appeared in the equity portfolio of Berkshire Hathaway in the third quarter of 2020. The company had acquired 58 million equity shares of Verizon Communications (VZ). This was the first in a series of transactions over the next few quarters. By the end of the first quarter of 2021, when Berkshire had stopped acquiring further shares, its portfolio contained more than 159 million shares in the telecommunications giant.

As this holding is worth more than $1 billion, and figures in the top 10 holdings with a portfolio weight of 3%, it’s reasonable to assume that Buffet himself had some input in this transaction. As it’s believed that Warren Buffett tends to oversee the most significant holdings in Berkshire’s portfolio while Todd Combs and Ted Weschler manage the smaller holdings. (Based upon information provided by Buffett himself in the past, and this may or may not be true today).

Verizon shares have fallen by 10% since the third quarter of 2020 despite the broad rally in equity markets. The stock recently hit its 52-week low, and it seems that the position has not worked out well for Berkshire Hathaway.

Buffett’s decision to buy Verizon is a bit surprising as he has criticized asset-heavy companies in the past as they consume a large amount of capital and tend to generate lower returns for the capital employed. Buffett has explained in his 2020 letter to the investors:

“The best results occur at companies that require minimal assets to conduct high-margin businesses – and offer goods or services that will expand their sales volume with only minor needs for additional capital.”

He further adds:

“Asset-heavy companies, however, can be good investments. Indeed, we are delighted with our two giants – BNSF and BHE [Berkshire Hathaway Energy]: In 2011, Berkshire’s first full year of BNSF ownership, the two companies had combined earnings of $4.2 billion. In 2020, a tough year for many businesses, the pair earned $8.3 billion. BNSF and BHE will require major capital expenditures for decades to come. The good news is that both are likely to deliver appropriate returns on the incremental investment.”

It’s quite possible that Buffett may see similarities between Verizon and the two Berkshire Businesses that we discussed above. He has remarked in the past how he sees his equity stakes as pieces of whole businesses. If Buffett wanted to build or acquire a stake in an asset-heavy business in the telecommunications sector, without wanting to spend tens of billions of dollars fighting for market share and building telecom infrastructure in an industry that he doesn’t perfectly understand, then buying a stake in a well-run telecommunications firm would be the next best thing.

Of course, this is pure speculation, but there are certain similarities between Verizon, BNSF, and BHE. According to Gurufocus data, the company’s weighted average cost of capital is around 3.1% and its return on investment is around 7.8%.

Source: https://www.gurufocus.com/news/1521098/why-does-warren-buffett-like-verizon

Source: Story.KISSPR.com

There is no offer to sell, no solicitation of an offer to buy, and no recommendation of any security or any other product or service in this article. Moreover, nothing contained in this PR should be construed as a recommendation to buy, sell, or hold any investment or security, or to engage in any investment strategy or transaction. It is your responsibility to determine whether any investment, investment strategy, security, or related transaction is appropriate for you based on your investment objectives, financial circumstances, and risk tolerance. Consult your business advisor, attorney, or tax advisor regarding your specific business, legal, or tax situation.

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