Verizon gets downgraded on fears higher rates will kill dividend-yielding stocks

  • MoffettNathanson lowers its rating on Verizon to neutral from buy, predicting investors will shift to growth-oriented stocks instead.
  • "The narrative of yield rotations has already begun; the playbook for the time being will be a relatively simple one: sell yield," analyst Craig Moffett writes.
Lowell McAdam
Cameron Costa | CNBC
Lowell McAdam

Verizon shares will struggle to beat the market due to fears over rising inflation, according to one Wall Street firm.

MoffettNathanson lowered its rating on the company to neutral from buy, predicting investors will shift to growth-oriented stocks instead.

"With lower tax rates (and with tight labor markets and globally synchronized growth) comes a materially greater risk of inflation. The narrative of yield rotation has already begun; the playbook for the time being will be a relatively simple one: sell yield," analyst Craig Moffett wrote in a note to clients Tuesday. "Even equity income managers are likely to rotate – in their case from dividend yield to dividend growth."

Moffett increased his price target on Verizon shares to $56 from $51, representing 8 percent upside to Friday's close.

The analyst said telecommunication stocks such as Verizon trade like "bond surrogates." He noted dividend yields for Verizon and AT&T have correlated with 10-year treasury yields. Moffett also said Verizon will not be able to maintain a dividend yield under 4 percent or an elevated stock price because the company lacks sales growth.

"While wireless pricing appears to be firm, the emergence of Comcast, and soon Charter, as new competitors appears poised to starve the incumbents of unit growth," he wrote. "The risks of a re-escalation of competitive intensity as the market struggles to find phone subscribers are real."

Verizon's current dividend yield is 4.6 percent, according to FactSet.

The company did not immediately respond to a request for comment.

Disclosure: Comcast owns CNBC parent NBCUniversal.

— CNBC's Patricia Martell contributed to this report.