Taking Stock: Sell Verizon shares and buy at AT&T

Dear Mr. Berko:
I own 200 shares of Verizon, which is now $34 but I bought them this year at $29. I’ve got a three-point profit after commissions and my gut says sell. This new investigation by the Federal Communications Commission about its billing practices concerns me because I think other charges may pop up.

Meanwhile, I have a Verizon phone. On two occasions, I tried to get in touch with them to correct a bill and it took me over two hours to get through on their toll-free number. That’s bad management and it concerns me.
MW: Wilmington, N.C.
Dear MW:
Verizon (VZ-$34) provides wireless service to 30 million land lines, which is down about 9.2 percent from last year. However, via its joint venture with Vodafone (VOD-$26.10), VZ has 93 million wireless customers. And VZ acquired 13 million wireless customers in one fell swoop when it acquired Alltel in January of 2009. But during the last few years, organic revenue growth has been unimpressive. And in the past 10 years, VZ’s earnings have bumbled from here to there like a drunk stumbling from bar to bar.

Some suggest, management may not be pulling its oars in unison. And with $110 billion in expected 2010 revenues, that’s not good. VZ also offers Internet service and has been forced to upgrade its speed and connectivity, which I’m told is still unsatisfactory. Meanwhile, earnings for 2010 are expected to come in at $2.30 a share, a bit lower than last year. The dividend recently raised an “utch” to $1.95 and yields 5.6 percent, but the consensus expects it to remain unchanged next year.

Wireless growth will continue to slow as VZ’s business matures. But a recovery might provide a stabilizing tailwind during the future years. And while VZ wireless has the strongest margins in the industry, revenue pressure from the fixed-line business are squeezing margins, even after aggressive cost cutting. VZ’s balance sheet is fine, even though the Alltel acquisition pushed debt levels to a bit over two times the operating income. Still, management has been using asset sales, spinoffs and cash flow to reduce debt.

VZ does not get high marks from brokerages on the Street, many of whom suggest that the shares are adequately priced around the $30 to $34 level and rate VZ as a “hold.” Several brokerages suggest that the VZ lads who occupy fancy corporate offices should do a better job of running the company. There are numerous complaints from subscribers who don’t like waiting hours on the phone to fix billing problems, to order services, to disconnect or to change an address. Another niggling problem is corporate honesty. VZ has knowingly been shafting customers for Internet and other data services they did not order.

Small charges have appeared on customer’s statements for years. And the FCC, after receiving numerous complaints, ordered VZ to refund $50 million (a pittance) to its subscribers. Some believe that refund should be in excess of $300 million. Now the FCC believes that there may be more shenanigans and it has broadened its investigations. At best, management is adequate, and at best VZ’s performance will also be adequate. Sell your 200 shares and buy AT&T, which is considered a superior telephone equity by most brokerages.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate Web site at www.creators.com.
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