Verizon: Is the Dividend Safe?

Communication companies have been in the news because of worries about lead-covered cables. In response, the stock price of all telecommunication companies plunged. But their stock prices were falling well before the recent news because of growth concerns. Verizon’s stock price has fallen since the end of 2020. The share price is at its lowest since late-2011. In fact, the dividend yield briefly went over 8%. Investors snapped up shares after spotting a deal. Investors may question whether Verizon’s dividend is safe despite the high yield.

Overview of Verizon

Verizon Communications (VZ) is the successor organization of Bell Atlantic; a firm spun off from AT&T in 1984. Verizon changed its name in 2000. Today, Verizon is one of the three prominent wireless companies. It also offers broadband and fixed-line services, primarily in the northeast. At the end of Q1 2023, the company has 143 million wireless retail connections, of which 114.5 million are consumer and 28.8 million are business. The retail connections are divided into 92.5 million post-paid, and the remainder are pre-paid. Verizon acquired Tracfone in 2021, adding 20 million pre-paid customers. In addition, the firm has 8.2 million consumer broadband connections, of which 6.8 million are FiOS. Verizon divested Yahoo, AOL, TechCrunch, and Engadget in 2021.

Total revenue was $136,835 million in 2022 and $136,193 million in the past 12 months. Verizon has a market capitalization of ~$142.81 billion.

Dividend Yield and Growth

Verizon is known as a high-yield income stock. But it is also a dividend growth stock with 19 consecutive years of increases since 1984. Hence, the company is a Dividend Contender. 

Although the dividend yield briefly rose above 8%, it is now about 7.76%, based on a dividend rate of $2.61 per share. This value is more than the 5-year average of 4.88%. In addition, the dividend yield is several times the average of the S&P 500 Index. Verizon started the year with a yield of 6.45%, placing it on the 2023 Dogs of the Dow list.

The telecommunication giant last announced a quarterly dividend increase of ~2% to $0.64 per share from $0.6525 on September 6, 2022. Though, Verizon’s dividend growth rates are low at approximately 2.07% in the past five years and 2.47% in the trailing decade. According to the Chowder Rule, this gives a Chowder Number (CDN) of 9.03%.

Is Verizon’s Dividend Safe

In addition, Verizon has solid dividend safety metrics from the context of earnings, free cash flow (FCF), and the balance sheet.

Payout Ratios

From an earnings perspective, the payout ratio was approximately 50% based on an annual dividend of $2.61 per share and forward earnings per share of $5.18. Our target value for the payout ratio is 65%, suggesting Verizon’s dividend is safe. Moreover, the low expected dividend growth rate is unlike to change based on prior history.

The dividend is also safe from the standpoint of free cash flow. In the last twelve months, FCF was about $15,385 million. The dividend required $10,895 million, giving a dividend-to-FCF ratio of roughly 70.8%. This percentage is slightly over our cutoff value of 70%. But the proximity and the other decent safety metrics make this value acceptable.

Balance Sheet

The wireless and broadband business is capital-intensive. As a result, Verizon has significant debt on its balance sheet, like most telecommunications companies. At the end of Q1 2023, the company had ~$2,351 million in cash, cash equivalents, short-term investments, and trading securities. Current long-term debt was $13,001, and long-term debt was $147,720 million. 

In addition, the leverage ratio at 3.46X, and interest coverage is more than 6.29X. But Verizon has a BBB+ / Baa1, lower medium investment grade rating, providing confidence about the safety of the financial position. Lastly, Verizon receives a dividend quality grade of an ‘A,’ meaning it’s in the 90^th percentile of scored stocks. The main weakness is leverage and revenue growth.

Competitive Advantage and Risks

One of Verizon’s competitive advantages is its scale and size, creating cost and operating efficiencies. In addition, scale allows the firm to invest in its networks and bid for spectrum, a capital-intensive activity. However, this fact limits competitors because few companies have the necessary capital. As a result, only three telecommunications companies control more than 90% of the wireless market, forming an oligopoly.

Another main advantage is Verizon’s national geographic coverage and perceived quality. Customers want as much coverage as possible without dropping a call or losing data connectivity. Furthermore, they want voice and data transmission quality.

Conversely, the wireless and broadband markets are competitive, creating risk. Besides AT&T and T-Mobile, the cable companies are trying to compete in wireless with local Wi-Fi networks. Also, they are strong competitors in retail broadband. Consequently, Verizon is required to continuously invest in technology or lose the race for speed and quality. In addition, Verizon operates in a regulated industry, adding the risk of government scrutiny for pricing and competition. Additionally, wireless spectrum sales and licensing are controlled by regulators.

Valuation

Verizon is clearly undervalued based on historic price-to-earnings ratios. Verizon trades at a forward P/E ratio of about 7.2X at the current share price. The multiple in the past five years has ranged from roughly 10.8X to 12.4X, signifying Verizon is undervalued based on this metric. In addition, the dividend yield is considerably greater than the 5-year average indicating the stock is again undervalued.

Final Thoughts on Is Verizon’s Dividend Safe

The excellent dividend yield is above the market average, making it attractive to people seeking income. But Verizon also pays a growing dividend, albeit at a low growth rate. Moreover, Verizon’s dividend is safe, and we do not expect a decline in the near term. We view Verizon as a long-term buy.

Disclosure: Long VZ

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