Verizon’s shareholders should be worried about the company’s direction.
Verizon executives have forced 39,000 unionized employees out on strike by pushing to offshore jobs to the Philippines, Mexico, and other locations, outsourcing work to low-wage contractors, closing call centers, and transferring workers away from their families for months at a
time. The current strike will depress Verizon’s future revenues and earnings. Customers upset with the service quality of replacement workers may switch to competitors. Many FiOS installations could be lost forever.
Zach’s Equity Research advises investors to sell, citing concerns around the strike:
It is crucial for Verizon to ensure smooth operations and continuing service even in the face of a strike. Cable and landline revenues, although not comprising a large share of the pie, are directly related to Verizon’s business customers.
Verizon is already facing competitive threat from its telecom rivals, AT&T Inc. T, T-Mobile US Inc. TMUS and Sprint Corp. S, and any disruption in services can prove to be a catastrophe for the company. Only time will prove how sound the company’s Business Continuity Plans (BCP) are to overcome such adversities. Verizon currently carries a Zacks Rank #4 (Sell).
Bloomberg reports that Verizon has warned investors that the strike will put pressure on second-quarter earnings.
The strike is not the only reason for concern.
Verizon’s share buyback program has come under fire for being shortsighted. In March 2015, Verizon announced a stock buyback program of 100 million shares (2.5% of outstanding stock). By year-end 2015, Verizon had repurchased $5 billion of shares. According to one study, companies that did not spend money on stock buybacks have performed better than those that have, and companies that spent the most on buybacks have performed worse as a group. Stock buybacks disproportionately benefit activist hedge funds who are seeking short-term returns. Buybacks may also be favored by senior executives because a key metric of their compensation is earnings per share (EPS), and buybacks reduce the number of shares, thereby boosting EPS.
At the same time, service quality has deteriorated to the point that the New York Public Service Commission and the Pennsylvania Public Service Commission are launching formal investigations. Verizon is not building out its high-speed FiOS service in numerous underserved areas in its footprint. In cities like New York and Philadelphia, Verizon has failed to meet the buildout obligations under their citywide cable franchise agreements. Verizon refuses to hire enough workers to do the job right.
Finally, executive compensation levels are excessive at Verizon when compared with other Company employees. In 1992 the ratio of pay between a field technician and William Ferguson, CEO of NYNEX (a Verizon predecessor company) was 53:1. In 2015, the ratio of pay between a field technician and Lowell McAdam, Chair and CEO of Verizon was 225:1. In our view, Mr. McAdam is not four times as productive as his NYNEX predecessor nor are today’s workers four time less productive than they were 23 years ago.
Verizon’s five named executive officers were paid a total of $47.8 million in total compensation for 2015 or $9.5 million per executive on average. Collectively, these five executives received a 7.5% increase over their total compensation in 2014. In contrast, Verizon has offered its rank-and-file employees wage increases of less than 2.5% per year.