Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Could Verizon’s Dividend Double?

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

The telecom sector is an income investor's dream. Multiple companies offer yields of at least 4%, and each company offers its own positive and negative attributes. However, when it comes to Verizon Communications (NYSE: VZ  ) , there are several reasons to believe that this company's dividend could easily double in the future.

The growth driver that everyone knows
It's no secret that Verizon Wireless has been a big driver behind the company's growth in the past, and will continue to be in the future. With Verizon taking total control of this division, investors should expect even better results from Verizon Wireless.

Verizon Wireless seems to consistently outperform its peers and, in particular, AT&T (NYSE: T  ) . In each company's recent quarter, Verizon grew wireless revenue by nearly 6% compared to AT&T Wireless' revenue increase of less than 5%. Verizon also reported a higher operating margin at nearly 30% compared to AT&T's 21% margin. Verizon's postpaid additions grew faster and the company reported a lower rate of churn.

No longer distracted
Now that Verizon Wireless will be wholly owned by Verizon, the company can focus on growing this business, rather than managing it to make payouts to Vodaphone. If you look at Verizon's dividend growth rate over the last several years, you can almost see the company being conservative because it knew a dividend to Vodaphone was expected.


With dividend increases in the last few years hovering below 1.5%, investors haven't had a lot to cheer about. Some investors might even think that going with a higher-yield stock would make sense. A local telecom like CenturyLink (NYSE: CTL  ) might be a good candidate.

CenturyLink offers a yield of nearly 7%, and as of last quarter had a core free cash flow payout ratio of roughly 52%. The company appears to be improving its operations, as revenue declined only slightly and management is forecasting strong free cash flow next year as well.

However, the difference between CenturyLink and Verizon is that Verizon is expected to grow its earnings by about 10% annually over the next few years, whereas CenturyLink is expected to see a 1% decline in this same time frame. As Verizon's earnings increase, the company should be able to grow its dividend, whereas CenturyLink's dividend isn't expected to increase anytime soon.

How could the dividend double?
The claim that Verizon's dividend could double is based on a few factors. First, Verizon's payout ratio is significantly lower than its peers. In the last three years, Verizon's average core free cash flow payout ratio has been just under 38%.

In the current quarter, Verizon's payout ratio dropped to just over 25%. By comparison, we already know that CenturyLink's ratio was 52%, and AT&T's payout ratio was just under 61% last quarter. Most investors would suggest that a payout ratio of 60% or less in the telecom sector is a sustainable number. Of course the caveat is that Verizon is issuing about $60 billion in stock to purchase the part of Verizon Wireless it doesn't already own. In theory this stock distribution would increase Verizon's outstanding shares by about 30%.

However, keep in mind during the last few years, Verizon Wireless has distributed $4.5 billion to Vodaphone in 2011, $4.5 billion in 2012, and just over a $3 billion dividend to Vodaphone in 2013. With Verizon owning the whole company going forward, this would have allowed Verizon to keep this $12 billion in-house. 

In the last 12 months, Verizon generated $23.5 billion in core free cash flow and paid $5.9 billion in ordinary dividends. With 30% more shares, Verizon would have needed $7.7 billion to cover its dividend outlay. Given the company's cash flow, the new payout ratio would still be relatively low at 32.8%. In order for Verizon's dividend to double, the company would have to pay $15.4 billion in dividends. With $23.5 billion in free cash flow, this would equate to a core free cash flow payout ratio of about 66%. While a 66% ratio would be significantly higher than today, AT&T's ratio is already at 61%, and it's not unusual to see payout ratios of 60% or more in the telecom sector in particular.

Given Verizon's strong growth prospects and cash flow generation, it's plausible that the company could grow its payout ratio to 66%. The stock carries a yield of roughly 4.5% today. If the payout ratio was 66%, Verizon would offer investors a 9% yield at current prices. With an expected earnings growth rate of 10% per annum in the next few years, Verizon already looks like a good buy. If the company is aggressive with its dividend growth after the Vodaphone deal, investors could be in for a big surprise.

I wouldn't suggest waiting to see if the company's dividend doubles, add Verizon to your buy list today.

You can profit from the smartphone wars
Want to get in on the smartphone phenomenon? Truth be told, one company sits at the crossroads of smartphone technology as we know it. It's not your typical household name, either. In fact, you've probably never even heard of it! But it stands to reap massive profits NO MATTER WHO ultimately wins the smartphone war. To find out what it is, click here to access the "One Stock You Must Buy Before the iPhone-Android War Escalates Any Further..."

Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 10, 2014, at 7:21 PM, Dave906 wrote:

    thanks for the VOD numbers ...You say that in the last year the VOD payment dropped to 3billion from 4,5 billion ..that kind of offsets all the growth potential hopefulness... furthermore the new Dividends on the freshly minted 1.3 billion VZ shares will eat up that extra 3billion almost entirely leaving very little to pay off the 70 billion that was paid in cash to VOD... Also noted You compare the RATE of Verizon growth to the RATE of T growth but the Actual to date financials and fundamental ratios show AT&T to be a better buy right now...Also EPS at T covers their Dividend now and VZs doesn't....then their is this new Bond thing and the share buyback that makes no sense after just printing them... where is all the new share demand supposed to come from?

  • Report this Comment On April 09, 2014, at 6:42 PM, Kelly15 wrote:

    Morgan Stanley is the latest of the sell-side analysts to raise Verizon’s outlook for 2014, pegging its target price at $52, Here is why

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2870693, ~/Articles/ArticleHandler.aspx, 8/29/2015 10:40:59 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Chad Henage

Chad is a self professed tech nerd and has been investing for over 20 years. He follows nearly everything in the technology and consumer goods sectors, and is a huge fan of the Peter Lynch investing style. He has over 1,000 published articles about stocks and investing. You can follow Chad on Twitter at @chadscards1274.

Today's Market

updated 13 hours ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:00 PM
VZ $46.07 Down -0.12 -0.26%
Verizon Communicat… CAPS Rating: ****
CTL $27.04 Up +0.30 +1.12%
CenturyLink, Inc. CAPS Rating: ***
T $33.29 Down -0.15 -0.45%
AT&T CAPS Rating: ****