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Sanford Bernstein made a huge mistake downgrading Verizon Communications, Cramer said Tuesday, but it does provide investors with a great buying opportunity.
Verizon [VZ
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], in Cramer’s opinion, is a recession-resistant stock with growth potential that offers a healthy 5.8% dividend yield to boot. So he thought SB’s call was a bit off, to say the least. But with the knock to underweight from neutral – hold to sell – costing VZ 8.2% of its share price over the past two days, there’s a chance for savvy traders to capture the $3 the stock just lost, and maybe more.
Sanford’s call was based largely on the idea that Verizon and its businesses – wireless, enterprise, telco – will do worse than the Street has already predicted because telco companies tend to be cyclical. And cyclical companies, the reasoning goes, often suffer the most during recessions. But that argument doesn’t hold weight for two reasons, Cramer said: One, the market loves cyclical stocks right now, so why wouldn’t VZ work? And two, this isn’t General Motors [GM
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] or U.S. Steel [X
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] we’re talking about. Verizon is a much more dynamic company that can weather downturns.
Specifically, Sanford said it was worried about net subscriber additions dropping as much as 20% more than Wall Street’s 20% to 25% consensus estimated declines. But with Sprint imploding and Verizon taking share, the company’s wireless segment might surprise analysts. Plus, there’s Research in Motion’s [RIMM
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] Blackberry Storm, a potential Apple [AAPL
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] iPhone killer that will be distributed exclusively by Verizon, to boost business as well.
Sanford was also concerned about Verizon’s triple play – voice, video and data – service FiOS. The firm didn’t think the lower-margin video revenue would be enough to make up for the loss in higher-revenue landline customers as people switch to cell phones. But again, Verizon’s taking share with FiOS, and Cramer doesn’t think a recession will get in the way of telco companies becoming the go-to providers of TV and Internet rather than their cable counterparts. So, if anything, there’s growth potential here.
Sanford was willing to admit, though, that Verizon’s dividend was safe. And what’s interesting is that if the stock drops to Sanford’s price target of $27, then VZ would pay out 6.8%, making it virtually irresistible to investors, Cramer said.
There are other positives here as well. Microsoft [MSFT
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] is trying to outbid Google [GOOG
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] to be the default search provider on all Verizon Wireless cell phones, cost savings from the Alltel merger are still adding up, and Verizon Wireless is one of the few marquee companies out there to which banks will lend. Just last month VW, which is a 50-50 joint venture with Vodafone [VOD
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], closed on the largest syndicated loan in U.S. history – $17 billion for just 3% above the LIBOR.
But let’s just say for the sake of argument that Sanford got everything right and Verizon is on track for a steep decline. Cramer still thinks the dividend alone is reason enough to buy this stock. But he’s confident that won’t happen, and this company can ride out a recession. In the meantime, that yield will pay you to wait.
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