Warren Buffett fans had a lot to glean from his latest letter to Berkshire Hathaway shareholders. What speaks louder than Buffett’s words, though, were his actions. Specifically, the ones he took in the fourth quarter of 2020. The most remarkable move, I believe, was his massive US$8.6 billion investment in U.S. telecom titan Verizon.
Shares of Verizon command a near-5% yield after its COVID-induced stumbles. And with the end of the pandemic in sight, it’s not a mystery as to why Warren Buffett made a big splash in the telecom space while valuations were still relatively depressed.
Warren Buffett sees opportunity in the telecoms
In numerous prior pieces, I stated that I thought the telecoms were among the best-positioned of COVID-hit firms to recover to pre-pandemic levels.
“Once the pandemic ends, the Canadian telecoms will be among the first to bounce back as a part of a potential post-pandemic discretionary spending boom,” I said in a prior piece in early-February. “Nest eggs have swollen amid the pandemic, and once COVID-19 is conquered, consumer sentiment will heal, and a lot of pent-up demand for certain goods will finally have a chance to be met.”
Warren Buffett’s big telecom bets suggest my optimistic expectations for the telecoms are not exagerrated.
While the discounts to be had in the telecom space isn’t as steep as some of the harder-hit areas of the market (think the airlines and cruise lines), the telecoms’ risk/reward trade-off is too good to pass up, especially for conservative investors looking beyond fixed-maturity securities for passive income.
A top telecom pick to mirror Warren Buffett’s big bet on Verizon?
The 5G boom is still at play, albeit it may seem like the pandemic has permanently diminished the appetite for the next generation of telecom tech.
In this piece, we’ll have a closer look at my favourite Canadian telecom play in BCE (TSX:BCE)(NYSE:BCE), which recently announced it’ll increase capital spending by over $1 billion to double its 5G coverage. The pandemic may have weighed heavily on BCE’s business through most of 2020, but the disruptions aren’t causing management to pull the brakes with its growth initiatives. In fact, they’re putting their foot to the gas.
Despite the accelerated capital expenditure plan, the firm had the confidence to hike its dividend by a very generous 5%. Such a dividend raise shows that management is incredibly bullish on its post-COVID recovery trajectory. And I think investors should take notice by punching their ticket into BCE stock while the yield is still swollen above the 6% mark.
What about valuation?
BCE stock trades at 22.7 times earnings, 2.2 times sales, and 3.1 times book value. Shares are modestly discounted versus that of its historical averages.
The stock sports a juicy 6.2% dividend yield which should serve as more than enough of an incentive to hold through the final innings of this pandemic. With the yield spread versus the 10-year note now at the highest it’s been in recent memory, BCE makes for a magnificent buy for investors who’ve grown fed up with lacklustre bond yields.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Joey Frenette owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends Verizon Communications and recommends the following options: short January 2023 $200 puts on Berkshire Hathaway (B shares), short March 2021 $225 calls on Berkshire Hathaway (B shares), and long January 2023 $200 calls on Berkshire Hathaway (B shares).