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Berko: FirstEnergy, Verizon and long-term growth

By Malcolm Berko

Published: April 29, 2017, 6:01am

Dear Mr. Berko: Last summer, I chose between buying 600 shares of AT&T at $38 and buying 500 shares of Verizon at $54. I bought Verizon, and it’s been straight down since, though the dividend was raised by 6 cents. Tell me why Verizon has collapsed and when you think it will come back to my purchase price, because I want to invest $25,000 in an electric utility my stockbroker recommended, FirstEnergy. Please tell me your opinion of this stock’s ability to provide long-term growth and income.

— F.A., Cleveland

Dear F.A.: Verizon Communications (VZ-$47) provides wireless, broadband, fiber optics and other services to consumers around the world. VZ is still the clear leader in the wireless industry, with over 113 million customers. VZ has a strong reputation and an enviable, high-quality network, and its FiOS service enables unparalleled data speeds across nearly 80 percent of the company’s service area.

VZ was firing cleanly on all cylinders last year. 2016 revenues came in at $127 billion. Earnings were $3.21 a share. And the dividend was raised again to $2.27 a share, giving shareholders a swell 4.7 percent yield.

Then, in July, while VZ was trading at $56, management announced it would buy Yahoo (YHOO-$48) for $4.83 billion, and VZ shares fell to $46. VZ was after YHOO’s 1 billion active users (600 million mobile) and its attractive brand and assets. But YHOO’s “attractive brand and assets” turned out not to be so attractive after all, and its usership was also declining. The “assets” included content (e.g., finance, news, sports), digital advertising technology and a polluted pool of dubious people — including CEO Marissa Mayer.

Some investors believe that VZ employees have become infected with Yahoo disease, a condition in which, every hour on the hour, workers get down on their knees with arms akimbo, flap their arms and squawk like chickens for 60 seconds. It’s a riot to observe. Unfortunately, there’s no cure for this affliction. Concerned shareholders, including officers and directors of Verizon, have been net sellers of VZ since last year. Late last year, the competition finally succeeded in putting a dent in VZ’s wireless growth, and revenues began to drop.

Of the 25 brokerages covering Verizon, seven — including Argus Research and O’Shaughnessy Asset Management — have “strong buy” recommendations. Two, Morningstar and Value Line, have “buy” recommendations. Fourteen say to “hold,” and two say to “sell.” The consensus says that VZ should rise to $54 in the coming dozen months. But I don’t think that’s going to happen unless VZ merges with Disney or Amazon.

Do you remember such old names as Ohio Edison, The Illuminating Co. and Toledo Edison? They are now part of FirstEnergy (FE-$30.60), a holding company that pays a $1.44 dividend yielding 4.7 percent. FE is also a holding company for Potomac Edison, which almost every utility investor owned because most of its revenues derived from federal government offices. In total, FE serves over 6 million customers in Ohio, Maryland, Pennsylvania, West Virginia, New York and New Jersey and in 2016 generated $15.25 billion in electric revenues.

FE has been in turbulence (operational problems/cost controls) since 2012, when the shares traded at more than $50 and earnings and revenues bounced around. Management couldn’t run FE’s nonregulated 1,572 megawatts of gas-fired and hydro businesses or other competitive energy assets that have pounded earnings and hurt dividend growth. FE has a contract to sell this generating capacity for $925 million. Meanwhile, management needs an industrial-sized enema.

Though the present doesn’t look good, FE has some promise for the future, and buying 800 shares might be a timely long-term investment.

Malcolm Berko addresses questions about stocks. Reach him at P.O. Box 8303, Largo, FL 33775 or mjberko@yahoo.com.

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