Summary
•The lingering union strike at Verizon is starting to have a financial impact on the company.
•The brand impact to Verizon Wireless could start showing up in customer churn.
•Investors have no reason to panic out of a 4.5% dividend yield, but the stock could easily give up the gains for 2016.
Now that a month has passed since last focusing directly on the union strike impact on Verizon Communications (NYSE:VZ), the lack of an agreement is bound to have a lingering impact. Investors now have to worry about a tarnished brand after union members have attacked the company for six weeks in a row.
The stock finally traded below $50 and now appears set to give up the gains of the year. Do you want to buy Verizon in front of this contentious union strike and a possible pending Yahoo (NASDAQ:YHOO) bid?
Lingering Impact
The original thesis was that the lack of an impact to the more important Verizon Wireless brand would allow the telecom to survive the strike with limited financial problems. After all, the wireline division only accounts for less than 30% of their revenues.
With the strike still showing no signs of reaching a near-term resolution, the impact to the company is reportedly being felt by even the wireless division. According to Wells Fargo research (via IBD), its analyst is significantly lowering wireline revenues and margins due to the strike.
The main impact is a lack of installation of new services including the important FiOS where even order activity is down substantially. Analyst Jennifer Fritzsche reduced revenue estimates by $343 million for Q2 and $826 million for the rest of the year.
In total, Verizon was expected to reach revenues totaling $128 billion for the year. The wireline division did $9.5 billion in quarterly revenues so the impact is nearly 2% of the revenue base as the year started.
Tarnished Brand
About four weeks ago and only two weeks into the strike, the buzz surrounding the brands of Verizon Wireless and FiOS were already at three-year lows. So despite no strike at Verizon Wireless, the wireline division has pulled down the brand according to YouGov BrandIndex.
The Buzz score for the brand has to be even lower now. Until the strike is resolved, Verizon can rely on the highest national ranking for the wireless network according to RootMetrics.
The wireless brand can easily survive the negative impacts of the wireline strike if management keeps their eyes on the network. The indications though are that business decisions related to wireless such as promotions are grinding to a halt.
Takeaway
My recommendation is to not let the strike turn an investor too negative on the stock with the 4.5% dividend yield. The big hiccup in that thesis remains the lingering impacts of the ongoing strike. If the Wells Fargo estimates are accurate, the strike is likely a few weeks away from causing a considerable financial impact to Verizon.
The reason to panic isn't here yet, but the wireless division is on the verge of a tarnished brand that could send customers to the competition. Investors need to remain diligent for a tipping point where switching to a originally perceived inferior wireless competitor might occur as customer impacts are felt from the lack of wireline installs and promotional activity on wireless.