Monday, September 22, 2014

A Recent "Sell" In My Portfolio

I've been a Verizon Wireless customer for nearly a decade. I recall my very first cell phone company ever was sprint circa 2003 or so. However, thanks to a family plan, I had the option of jumping in to my dad's phone plan which was from Verizon. And the rest is history.

Over the years the main comments I've heard from family, friends, or even random people about Verizon is that the service is excellent (probably the best in the industry) however, they are expensive relative to the benefits you get with your respective plan. By the way-- when I mention service, I am referring to characteristics such as the voice quality when you are speaking to someone on the phone, less dropped calls, being able to use your phone even in the "middle of nowhere", fast wireless internet get the point. 

Being a customer myself, I always sympathized with the comments about how pricey the service is. Although my bills are a lot more affordable now thanks to a nice deal (yes, I am still a customer)--- I have to admit that for many years my monthly bills were rarely ever under $90 a month.  And this is because I was able to get 10-20% off through employers but I never really had the benefit of "unlimited everything", as some companies did/do have. I have to mention that I've been out of my father's family plan for almost 8 years so, I am talking about my own individual service.

If you've been following my blog you know that the majority of my portfolio is composed of established blue chip companies that are well known within their industry (usually leaders), have a strong customer base, are quality companies (based on my research), and pay nice dividends. Hence, after paying my hefty cell phone bill one day last year I decided to take a look at Verizon as an investment. As I did more  research which included reading the annual report (10K), looking through financials and reading articles; I decided this was a good, solid company where to put my money. I also really liked the fact that their dividend yield was high. It is currently at (4.20%) which means that I would get a nice return on my money on a yearly basis as I continued to watch the development of this industry leader.

The Buy/Sell Process

In February 2013 I pulled the trigger and began purchasing shares of Verizon. I bought additional shares every 30-45 days,  at a sliding scale, consider that as soon as I made my initial purchase the stock price did begin to fluctuate and went down slightly as the weeks and months went by. This is something that happens a lot with stocks in general, and no reason to panic.

Considering I am a long term investor (I hold stocks for at least one year and preferably forever) I did not pay much attention to the fact that the stock price was not appreciating much from my time of purchase. For instance, I bought initial shares at around $46. The stock would go to $47 or $48 but then go back to hover around my initial purchase price. And then on September 2013 some "exciting" news came-- Verizon had decided to buy off Vodafone's 45% stake in the company at a deal worth $130 billion (you can read more about that here). The news made me a little nervous because most of the deal would take place with debt which means that the long-term debt shown on the balance sheet would pretty much balloon to dramatic proportions (VZ current long term debt as of June 2014 is at over $107  billion). So, on the one hand, the company would no longer have to share profits with Vodafone and it is now free to perform operations for growth as needed. On the other hand, all of these added benefits come at the expense of high debt and investments which we never know the exact extent of their profitability in the long term.

I then started to worry about competition. To be quite honest, the telecommunications industry is highly competitive and even more so during this day and age. AT&T (NYSE: T) has been neck to neck with Verizon for quite some time offering nice benefits to shareholders and improving their infrastructure when it comes to quality service and same goes for other companies such as T-Mobile (NYSE: TMUS), for instance. Furthermore, we cannot forget about the fact that customers are constantly looking for the best deal they can possibly get when it comes to phone plans. The fear of loosing your number if you move to another company is long gone after a law by the Federal Communications Commission (FCC) made that possible a while ago. And today, company's like TMobile are willing to pay off your cancellation fee to providers if you wish to switch companies. Something that kept people "tied" to phone companies in the past was having to pay a hefty cancellation fee prior to contract expiration. Well, apparently that is also changing. Another point to note is that a couple of year ago or so Verizon stopped offering the "unlimited data" option that other companies still offer. Hence, although this may be good for Verizon's bottom line as they may be able to collect more funds from customers that are consistently on their phones using the internet; this may not be so good for customers whom would rather go online at any time without the fear of getting an outrageous data bill at the end of the month.

And so, a couple of months ago I decided to "pull the trigger" once again and sold my position on Verizon Wireless. I also have to mention that my purchases had eventually become a significant part of my portfolio which I didn't feel comfortable with. I made the decision to sell all my shares and look at a different company (this is a topic for an upcoming post). High debt, high levels of competition, a stagnant stock price and a change that deviated from my original investment thesis propelled me to make the decision to sell. I did profit from over a year worth of nice dividend payments, as well as slight percentage gain in price so ultimately I walked away with a profit.

Do I think VZ a bad Investment?

Definitely not. Far from it!  Verizon has now been hovering around the $50s which is great and the benefits of being "Vodafone free" appear to be working for the company. The stock is trading around 11x earnings which is below industry average (but slightly higher than competitors), also continue to raise their dividend yield which is something they have been doing since 2006. At the beginning of this month they announced an increase to $0.55 cents per share up from last years $0.53. They continue to be a leader within the industry and even Buffett’s Berkshire Hathaway portfolio picked up some shares at the beginning of this year-- which is obviously a big deal. Hence, although the company may still be a great investment; my original thesis for buying shares was not holding up as expected and thus, I made my decision. Whether or not my decision was right or wrong only time will tell and unfortunately, crystal balls that allow us to see the future are yet to be invented.

What did I do next?
One thing I have learned in investing is that it doesn't make much sense to sell unless you have a plan of action of where you'll put that money next or what you'll do with it. Hence, stay tuned for an upcoming post regarding where some of that money went within my portfolio.

What are your thoughts on VZ?

Thank you for reading. And as always-- cheers to profits!