Verizon stands out with a notably high dividend yield.
Verizon (VZ 1.61%) is something of an anomaly in the Dow Jones Industrial Average. Its yield, approaching 7%, significantly surpasses the average of 1.7% amongst the 30 stocks in the index, with the second-highest, Chevron, at 4.3%.
A robust dividend yield can sometimes signal underlying issues and may indicate a greater risk of future cuts. Let’s explore if Verizon is a wise investment for those seeking income from dividends.
Financial Overview of Verizon
Recently, Verizon unveiled its financial results for the third quarter, shedding light on the metrics that support its dividend. The company posted revenue of $33.8 billion for this period, reflecting a year-over-year increase of 1.5%. Additionally, adjusted earnings climbed 1.7% to $1.21 per share.
Year-to-date, Verizon has generated $28 billion in operational cash flow, an uptick of nearly 6% compared to last year. The company allocated $12.3 billion for capital expenditures aimed at both maintaining and expanding its network, resulting in free cash flow of $15.8 billion. This is $1.3 billion more than last year, sufficiently covering the $8.6 billion in dividends paid so far.
Verizon has directed excess cash after dividends toward bolstering its balance sheet. As of the end of the second quarter, the leverage ratio dropped to 2.2x, down from 2.5x the previous year. This figure aligns with the company’s target ahead of its anticipated $20 billion acquisition of Frontier Communications. The low leverage ratio helps maintain Verizon’s respectable investment-grade bond rating (A-/Baa1/BBB+).
These strong cash flows and a solid balance sheet indicate that the high dividend payout is likely sustainable moving forward.
Future Prospects for Verizon
While Verizon’s financial results are decent, there’s a sense of dissatisfaction, especially with the current stock price—which contributes to that high yield. The company has recently appointed Dan Shulman, a former PayPal CEO, to lead its growth resurgence. During the recent conference call, Schulman articulated an ambitious strategy.
“We’re not focused on small changes. We plan to boldly transform our culture and financial standing, emphasizing customer needs and ensuring financial discipline that prioritizes shareholder value,” Schulman stated. The company intends to invest significantly in marketing and enhancing customer experiences while funding these endeavors through substantial cost reductions. Notably, they’re looking to leverage AI in their strategy.
These measures are expected to ramp up revenue growth and free cash flow generation. Free cash flow is anticipated to rise next year as the Frontier acquisition integration unfolds, a crucial component of the company’s growth plan. Verizon aims to cross-sell mobile and broadband services more effectively, leveraging the partnership with Frontier to extend its fiber network and customer reach, likely enhancing profit margins and customer relations.
Schulman emphasized that Verizon’s dividend is fundamental to its value for shareholders, asserting a steadfast commitment by increasing the dividend for the 19th consecutive year. The company will continue to reduce its debt post-acquisition and aims to eventually return more cash to investors through stock buybacks beyond dividends.
Verizon: A Reliable Earnings Investment
Verizon generates significant cash to support its high-yield dividend. With the new CEO steering growth efforts, the expectation of increased surplus cash generation looms large. Coupled with solid financial metrics and a commitment to dividends, Verizon emerges as a strong option for dividend-seeking investors.
