Berko: Verizon stock builds foundation

Dear Mr. Berko: I’m 49, and for each of the past eight years, I’ve invested between $8,000 and $12,000 in my simplified employee pension individual retirement account, which is now worth $119,000. My first investment was Johnson & Johnson in 2006, and the following years, I bought Microsoft, Colgate, Monsanto, CVS, Boeing, Becton Dickinson and General Dynamics. This year, my broker (who is unfortunately retiring in December) recommended I buy Verizon. This recommendation surprised me because Verizon is an uninspiring phone company that seems to me to have little appreciation potential. Before I commit, I need to think more about this stock and would appreciate your thoughts.

— HS, Detroit

Dear HS: Kudos and a gold star to your broker, whom I would put in an exhilarated class. I like this guy and his recommendations. He has given you seven dandy stocks, and his “uninspiring” Verizon choice would be an exceptional addition to give your portfolio a strong foundation. Don’t sit there hanging in limbo; buy Verizon today, and remember to reinvest all the dividends.

“Verizon” is derived from the Latin word veritas and the English word horizon, meaning “truthful visionary.” And if I can read the tea leaves, Verizon, yielding 4.3 percent, should be a ducky growth and income investment that you can depend upon for the best of your life.

Verizon Communications (VZ-$49.34) was formed in 2000, when GTE merged with Bell Atlantic, one of the seven Baby Bells divested from AT&T in 1984.

Net profit margins (net profit from each dollar of revenue) are an excellent measure of management’s skills. In the early years of this decade, VZ’s net profit margins ranged between 5 and 6 cents per dollar of revenue. (By comparison, AT&T’s net profit margins were between 10 and 11 cents per dollar of revenue.) But during the past few years, those in VZ’s management began eating their Wheaties. Here are some of their accomplishments:

• New mobile plans have reduced the churn rate so much that the competition is worried.

• An aggressive discount plan allows users to upgrade their phones each year without a down payment.

• New add-ons and apps have increased VZ’s average revenue per user.

• Its FiOS network generates the fastest data speeds.

• VZ’s marketing campaign has enabled it to capture a larger share of the highly valued, enormously profitable prepaid customer market.

• VZ’s customer service puts the competition to shame.

Verizon is among the dozen or so foundation stocks that should be in everyone’s growth and income portfolio. VZ is a rock-solid company with 105 million subscribers. It can remain in your portfolio come rain, sleet, snow or a tanking market. Vanguard, J.P. Morgan, State Street, BlackRock, Wellington, Northern Trust, Capital Group and the Bank of New York own hundreds of millions of VZ shares. And when I asked a Vanguard fund manager (whom I’ve known for years) about VZ, he said his company owns the stock because its share price, revenues, earnings and dividends have a high degree of predictability.

There are 33 brokerages following VZ. Twelve have a “strong buy” recommendation; 12 have just a “buy” recommendation; and nine rate VZ as a “hold.” Wall Street believes that over the next four years, VZ could grow revenues to $141 billion from $126 billion, earn $4.70 a share — up from $3.55 this year — and increase its dividend to $2.60 from this year’s $2.20. Value Line believes that VZ could trade between $70 and $80 by 2018 and grow its net profit margin to 13.5 percent. However, Morningstar, an equally respected research firm, suggests the stock is fairly valued at $49, and highly regarded research firm Market Edge gives VZ an “avoid” recommendation. But buy the stock!