In an election year focused on the 1% vs. the rest of us, it’s nice to see the union prevail against Verizon Communications Inc. (VZ) in its strike — especially when anyone holding VZ stock is a winner in this deal too.
After seven long weeks, 36,000 will return to work this week after the Communications Workers of America and the International Brotherhood of Electrical Workers wrangled a surprisingly good deal out of the Verizon strike. No, they didn’t get everything they wanted — no one ever does — but they did far better than anyone thought they would when they walked off the job.
The union’s new contract should ensure labor peace for the next four years — something that’s always good for shareholders — and puts an end to an increasingly onerous labor action. The market hasn’t cared much about the effect of the Verizon strike on VZ stock so far, but it was only a matter of time before the income statement and outlook started to spring leaks.
Under the new deal, the unions got a raise of nearly 11% over the length of the contract. VZ originally offered 6.5%, so that’s a big win. Workers also won a small increase in pension benefits and a pledge to add 1,400 new union jobs.
However, the biggest concession workers won out of the Verizon strike was an agreement to scale back subcontracting and kill a proposal to relocate employees for long periods of time.
VZ Gets Something Too
Analysts were surprised at how well the union did in ending the impasse, but it was hardly a wipeout. More than anything, VZ wanted the union to pay more for its healthcare benefits, and the carrier got what it wanted. The company also won concessions on offering buyouts and routing customer-care calls around the U.S.
Most importantly, VZ gets a deal before the strike did any real damage to the share price or bottom line. It also gets the company out of the headlines at a time when the public is increasingly angry about economic inequality.
Those are huge wins for shareholders, who, after all, are sitting on a gain of 10% for the year-to-date — before dividends. Pokey, defensive VZ stock is killing the broader market this year by 7 percentage points.
Why mess with success? Shares in Verizon rose on the news, reflecting approval of the deal on the part of investors.
Well they should. VZ can easily afford the wage hike and other costs associated with the new contract. Lost amid the handwringing over the union prevailing over VZ is the fact that it has operating margins of 25%. It’s by far the most profitable telecommunications company in the U.S.
Besides, VZ doesn’t need the distraction. The company is reportedly in the pole position for acquiring Yahoo! Inc.‘s (YHOO) core business. With AOL already in the fold, VZ is making big bets on digital mobile advertising to drive growth in a saturated market for traditional telco products and services. It needs to concentrate on striking this multibillion-dollar deal, not squabbling over contract points.
For both sides, it’s good to have put this headwind behind them.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
