Verizon: Is The Union Strike A Threat?

| About: Verizon Communications (VZ)
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Summary

Two major unions go on strike against Verizon disrupting new service installations.

At this point, the strike is mainly isolated to the wireline business insulating the investment impact.

Verizon will continue trading weak as the strike and the Yahoo bid impact shareholder sentiment.

Due to the market focusing on the Yahoo (YHOO) bid, Verizon Communications (NYSE:VZ) isn't getting much attention regarding the union strike. The Communications Workers of America and the International Brotherhood of Electrical Workers went on strike on Wednesday and even had Democratic presidential candidate Bernie Sanders attend a rally.

The stock has traded weak all week due to a mixture of the strike and some concerns regarding purchasing Yahoo. A sudden surge in wages and benefits for employees or a disruption in services could hurt the outlook for the telecommunications company. At $51 and offering a 4.3% dividend yield, Verizon is shifting back into the value mode, but will the unions disrupt this value proposition?

Strike Details

At 6 am on April 13, 36,000 wireline employees on the East Coast belonging to the CWA and IBEW went on strike. According to this CNBC video, these union members make roughly $130,000 annually in wages and benefits. The details on those amounts are sketchy, but the impacted groups are mostly the workers from the landline business that includes the Internet business.

The key though is that the wireless unit isn't impacted outside of reportedly 100 employees (via WSJ) that are a part of the CWA. The latest Verizon report lists 178,000 total employees so the workforce on strike only amounts to roughly 20% of the workforce.

The demands appear more centered on preventing the outsourcing and even offshoring of related jobs. Reportedly, Verizon has offered a 6.5% pay raise, but the pay increase comes at a loss of benefits such as pension and healthcare related items.

The basic details suggest that the bigger impact to shareholders is the potential disruption of business and any lost brand power that Verizon Wireless now holds. The following statement from presidential candidate Bernie Sanders won't help matters:

I know there's going to be a lot of pain involved. I want to thank you for standing up to the outrageous greed of Verizon and corporate America.

Strike Impact

For Q4, Verizon listed revenues of $34.3 billion with roughly $9.5 billion from the wireline division. According to these numbers, the wireline division only accounts for around 28% of total revenues.

The expense aspect of any increased benefit demands from unions are more difficult to ascertain. The wireline division only had Q4 operating income of $689 million for an operating margin of 7.3%. Clearly, this division doesn't have a lot of profits to share.

Of the $8.8 billion in quarterly wireline expenses, the cost of services amounted to roughly $5.2 billion. A lot of the costs for the union members that include equipment and network installation would presumably fall into this category. The other costs are for depreciation costs and SG&A expenses that are presumably not union related.

Based on these quick numbers, the strike isn't something that necessarily disrupts the profit picture via some high demands for increased benefits. What the strike does though is prevent Verizon from obtaining more reasonable margins in the wireline division. As an example, the non-union wireless division has an incredible operating income margin of 28.6%.

The razor thin margins in the wireline segment make it difficult for Verizon to remain competitive in the Internet and pay-TV business going forward that requires equipment installation or network upgrades.

Takeaway

Clearly, Verizon has transitioned away from a reliance on union employees or the related revenues as wireless now dominates the business. The biggest concern with the strike is a tarnished image that has a carryover impact to Verizon Wireless.

For now, my bigger concern for investing in Verizon is the potential bid for Yahoo under the mindset that the company can somehow fix the failing business. The stock will continue trading weak as the confluence of these two events hurt the outlook for the company.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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