October 12, 2010, 12:22 PM — Shares of telecom giant Verizon Communications Inc. were down more than 2.5 percent in early trading Tuesday after Bernstein Research analyst Craig Moffett reduced his rating for Verizon to "underperform," Wall Street code for "get rid of this sucker."
By late morning, Verizon (NYSE: VZ) was trading at 32.35, down 68 cents, or 2.06 percent, from Monday's close of 33.03. Shares had been as low as 32.20 earlier in the morning.
According to MarketWatch, Moffett told clients in a note that Verizon was now "at a historically high relative valuation level" after a 12 percent share-price increase since Sept. 1. (Shares also are up 30 percent since June 1.)
His primary concern, however, was Verizon's ability to meet its dividend obligations. Verizon Wireless is a joint venture between Verizon, which owns 55 percent, and U.K.-based telecom Vodaphone Group, which owns 45 percent. At some point Verizon will begin making cash payouts to Vodaphone, which Moffett fears will leave "a razor-thin margin for error," thus jeopardizing future dividend growth.
While Moffett emphasized he's not forecasting a cut in Verizon dividends, Wall Street likely will "demand a significantly higher dividend yield" than the company might be able to provide, MarketWatch reported.
Moffett's fears seem to have resonated with investors on Tuesday. In contrast, an upgrade of Verizon shares by brokerage Argus -- based on the recent iPhone deal with Apple and the imminent launch of Verizon's 4G wireless network -- seems to have fallen on deaf ears.