In the third quarter of 2020, an interesting position appeared in Berkshire Hathaway's (BRK.A, Financial) (BRK.B, Financial) investment portfolio: Verizon Communications Inc. (VZ, Financial).
I say this was an interesting investment because, considering its size (around $9 billion), it seems as if Warren Buffett (Trades, Portfolio) may have initiated this position himself.
Buffett has attacked large telecommunication companies in the past. In a lecture several decades ago, he compared what was then AT&T Inc. (T, Financial) to a newspaper business, calling the former "the agony" and the latter "ecstasy" of businesses.
At the time, Buffett attacked the telecommunications company for its poor returns on invested capital, high capital spending requirements and lack of growth.
However, since this lecture was published several decades ago, Berkshire has been building its portfolio of infrastructure assets. As the conglomerate has grown, it has had more and more cash it has needed to deploy. One of the most effective ways to deploy a large amount of capital and achieve a relatively reasonable return is to invest in infrastructure assets.
Today, some of Berkshire's most prominent businesses are BNSF, a railroad, and Berkshire Hathaway Energy (BHE), a utility.
I have commented on this situation before. It could be the case that the Oracle of Omaha wanted to deploy a large amount of capital quickly, and the easiest way to do that while earning a relatively attractive rate of return compared to Treasuries was to invest in the common equity of Verizon.
One could make a good argument that if Buffett is happy to invest billions in building a railroad, he should also be happy to invest $9 billion in a telecommunications network. After all, when Buffett buys a stock, he sees it as an addition to Berkshire's business portfolio.
Leaving aside the speculation on why Buffett might have acquired the position, I thought it would be worth taking a look at the company to see if it could be a good addition to the average investor's portfolio.
Indeed, this seems to be one of the cheapest stocks in Berkshire's portfolio right now. At the time of writing, shares in Verizon are changing hands at a forward price-earnings ratio of 10, and they are dealing at an enterprise value/Ebitda multiple of 7.5.
The telecommunications sector is not particularly trendy, so I would never expect Verizon to attract the sort of multiple high-growth tech stocks may achieve. Still, the company does look cheap compared to peer T-Mobile US Inc. (TMUS, Financial), selling at an enterprise value/Ebitda multiple of 8.6, and AT&T, which is selling at a enterprise value/Ebitda multiple of 11.6.
As well as this valuation, the stock offers an attractive dividend yield of 4.8%.
These metrics look attractive, but I have always stayed away from telecommunication companies for the same reasons Buffett outlined years ago. These companies need to invest billions of dollars every year just to remain competitive. For example, Verizon spent $46 billion in Spectrum in 2020. Thanks to this spending, net debt jumped from $107 billion to $141 billion.
Nevertheless, this is all part of the company's plan to roll out a competitive 5G package. Verizon is initially charging $50 per month for 5G Home for existing wireless customers. This is designed to compete with cable customers and provide customers nationwide with attractively priced access to broadband internet, cable TV and phone connectivity.
Verizon's competitive advantage is its size and scale, and as we move into the next stage of the digital revolution, its scale will become an invaluable asset in deploying technology. Not many companies can afford to spend $46 billion in one year on Spectrum.
So considering this potential, the stock could offer an attractive growth at a reasonable price of opportunity, although there is no guarantee Verizon's growth gamble will pay off.
