As the chaos from last week continues, with the markets dominated by fear rather than fundamentals, Verizon Communications (VZ: Charts, News, Offers) suffered another debilitating blow in the form of a massive strike. Verizon’s union employees officially went on strike on Sunday, effectively freezing an entire segment of the company at the worst possible time. The company is currently hounded by two unions – the Communications Workers of America (CWA) and the International Brotherhood of Electrical Workers (IBEW), which have been negotiating since late June over healthcare contributions, pensions plans and work rules. The striking employees are mainly technicians and customer support employees in the company’s troubled wireline unit, which provides traditional landline services to homes and businesses in the northeastern United States, as well as high-speed wired Internet and Fiber Optic services. When the previous collective bargaining agreement expired on Saturday night at an impasse, 45,000 disgruntled workers staged the first walkout in the company’s history. It has been 11 years since Verizon’s last clash with the unions, when 80,000 employees went on strike for three weeks back in 2000.
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The unions quickly point to the $6 billion in estimated profits Verizon will earn in fiscal 2011, as well as the $10 billion dividend payment it made to Vodafone, which owns 45% of Verizon Wireless, as proof of the company’s financial health and ability to meet union demands. However, things aren’t as simple as the unions believe. Verizon has been downsizing its wireline business, due to a decade of decline attributed to landlines being disconnected in favor of cellphone and Internet services. Meanwhile Verizon Wireless, which is staffed by non-union employees, has been highly profitable, with the exploding popularity of smartphones from Apple (AAPL: Charts, News, Offers) and Google (GOOG: Charts, News, Offers) being its primary growth drivers. 94% of the $9.6 billion in operating income Verizon posted in the first half of 2011 was attributed to its wireless business.
Meanwhile, local phone lines and wired Internet services have been on a steady decline. In the past five years, the company’s 47 million local phone lines have decreased to 25 million, dropping an average of 8% annually. Currently 30% of American homes only use wireless connections. Verizon’s wireline business only survived due to a massive investment in fiber optic cables, which created the “FIOS” network that replaced its traditional copper phone lines. To offset this decline, Verizon decreased its payroll from 252,000 to 196,000 over the same period.
However, its existing collective bargaining agreements with the unions were signed decades ago, before the rise of wireless communications, when its wireline business was booming – and Verizon is now struggling to match these previous agreements. A major issue concerns Verizon’s special charges to coax union members to retire, which has totaled $18 billion for the decade. Until recently, these charges were hidden from shareholders, classified as special, one-time charges, and thus ignored in earnings reports. When these retirement payments are added, the company’s wireline business’ already thin profit margin is completely erased. The company’s lucrative 5.5% dividend, which is a primary draw for shareholders, is also in danger of being slashed if Verizon decides to increase its pension investments, which union members have demanded to be increased.
There is no easy way out of Verizon’s predicament. While it would be better to dissolve its wireline business segment altogether and focus on wireless services, this is not a shift that can happen overnight. Meanwhile, it must feed the hungry beast of old guard unions in a dying business segment, which will inevitably cut deeply into its bottom line. Meanwhile, an earnings miss in this irrationally pessimistic market environment could decimate its stock price, which would neither help investors nor employees. Fundamentally, the company is strong, trading with a P/E of 15 with gross and net profit margins of 59.5% and 13%, respectively, which are both higher than industry leader AT&T (T: Charts, News, Offers). Verizon’s dividend also complements its low beta well, and is favored by many analysts as an ideal income stock, with slightly better growth potential than AT&T. However, in this chaotic market, fundamentals have all been tossed out the window, and it’s hard to see which stocks are still worth owning. If Verizon can resolve this current strike, at least investors will have one less thing to worry about.
Other News About VZ
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How will the strike affect the release of the highly anticipated Verizon iPhone 5?
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
Your article is well written with insight and kudos are deserved with one exception.
You state that the buy outs for early retirements wipes out the profit of VZ for the last decade. This is totally misleading. Those sums came from the pension funds. Starting in thelate nineties both management and union funds were well overfunded. The management fund was raided giving sup par offers at the time along with removing the defined benefits of a fixed pension when the stock market was beginning its decline. My wife a management employee was given a sum in 2000 that would not buy an annuity equal to my union pension while ignoring the fact that before they grabbed the management pension fund her pension would have been 30% larger due to higher pay and longer service, more than 30 years. The remainder was invested in “safe” investments by a broker with more initials after his name than I have in my first and last name combined.
The rest of that story is obvious to any one following the market. Five years of not touching it watched it add 16,000 from a class action suit and all of it decline from $300,000 to $115,000 before it regained some to about half its original figure never coming near the original.
Subsequent class action suits regained defined benefits pensions for management employess but not those that were in the interim like my wife. We ended up with less than half of the sum that would not buy an annuity near the defined benefit sum. A strategic move by VZ it turbulent times. A rape of loyal employees.
My own union pension on the other hand was a defined benefit from an overfunded pension fund. The union continued to battle the company that wanted t raid it too. They lost in later years. Payouts of buyouts were taken from the pension plan then VZ took what was left and began paying the pension from operating funds. Currently there is a deficit and the pension fund is financed yearly. Before VZ was allowed by the courts and had raided it the pension fund was self supporting. Now they are crying poverty and want it all.
My pension for thirty years received an extra $500 per month until I turned 62… It is now fixed at $900.00 as they receive no cost of living or other increases and I retired in 1998. The medical is the only thing to allow meeting cost of living. The medical cost is actually less than in 1998 using VZ yearly statements which say what it is worth.
In short the buyouts came from assets that were set aside to pay pensions funded on a yearly basis as they were required to meet demand. It did not affect the bottom line until creative accounting said it did after the courts allowed them to do so. They stole from a budgeted and overfunded item and now claim they do not have enough.
re:Leo Sun at Investerguide.com. Allow me to quote some of your article and respond.
Verizon Communications (VZ) Gets Paralyzed by Unions
this title sounds a little biased. i am a union member or as you refer to “hungry beast”. Let me correct some of your misinformation. Verizon is not losing money. the landline services are being converted to Fios Digital Voice, a very profitable portion of the companies business. my department brings customers back from other companies that are not satisfied with their current provider, again very profitable and many of these customers are Fios Digital Voice. since when does a stock analyst use terms like “dying beast” that doesn’t sound like analysis to me that sounds like an opinion. the “beast” consists of the hard working men and women that made Verizon a leader in the telecommunications industry. Maybe American jobs are going to Mexico, India, Canada oh just pick a country. If the jobs stay here we will have a middle class again someday.
“Verizon’s union employees officially went on strike on Sunday, effectively freezing an entire segment of the company at the worst possible time.”
That would have something to do with 100 demands on the part of Verizon and an unwillingness to negotiate. Do you really believe that we want to be on strike? Were you even around decades ago? Do you even know why the unions went on strike? Have you spoken to any authority at the Unions?
Here’s quote from your article:
“The company is currently hounded by two unions “. This seems to be another of your opinions.
So IBEW and CWA are hounding Verizon.
“Verizon is now struggling .Meanwhile, it must feed the hungry beast of old guard unions in a dying business segment, which will inevitably cut deeply into its bottom line. Meanwhile, an earnings miss in this irrationally pessimistic market environment”.
Why didn’t verizon pay any federal income tax last year? I did.
Why did verizon get a $1.3 billion refund last year? I had to pay a few more dollars.
I don’t think Verizon is struggling at all. It is we the middle class that is struggling. Do your homework Mr.
Sun
http://www.investorguide.com/a.....by-unions/
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