Is Verizon Communication Inc's Dividend Growth Safe?

It's critical to analyze the underlying financial performance of a business to understand whether its dividend is sustainable. Here's what matters to those counting on Verizon's hefty dividend.

Jul 1, 2014 at 2:00PM

Investors count on the major telecommunications companies like Verizon Communications (NYSE:VZ) and AT&T (NYSE:T) for reliable cash flow and hefty dividends. Indeed, both Verizon and AT&T pay high yields that tower above both the yield on the S&P 500 Index as well as the 10-Year U.S. Treasury bond. Even better, Verizon and AT&T are able to raise their dividends modestly on an annual basis, thanks to their growth.

But of course, no dividend is an absolute guarantee. As investors, it's critical to analyze the underlying business performance of a company, to make sure it's covering its payout with sufficient free cash flow. After all, a company can only pay a dividend without the supporting cash flow for so long. Avoiding companies in danger of cutting their dividends is one of the most important things an income investor can do.

With that in mind, let's take a closer look at Verizon to see whether it has the financial strength to keep paying its strong 4.3% yield.

Dividend track record provides confidence
As previously mentioned, Verizon has a good track record of paying, and even raising, its dividend. To that end, Verizon has increased its distribution for the past seven years. Its most recent increase came last fall, when the company bumped up its payout by 3%.

Likewise, AT&T also has a long history of rewarding shareholders. Last December, AT&T raised its dividend by 2%, representing the 30th consecutive year of a dividend increase.

While Verizon's dividend history doesn't seem very well established, you should know it's only traded publicly since 2000. Prior to then, it was known as Bell Atlantic. But rest assured, Verizon is just about as committed to providing shareholders with a compelling dividend as any company can be.

Robust free cash flow should allow for future dividend increases
Verizon has had two key strategic priorities over the last few years, both of which are now completed. The first was to obtain all of Verizon Wireless from European telecom Vodafone. Verizon forked over $130 billion to acquire the remaining 45% stake in Verizon Wireless that it didn't already own. This made a great deal of sense, since Verizon Wireless is the largest and most profitable wireless carrier in the United States, according to the company.

The second core objective was to invest in fiber optics. Verizon's investments in its infrastructure over the past several years have really paid off. Verizon reported nearly 15% growth in FiOS revenue last year, boosted by 536,000 new FiOS video subscribers and 648,000 FiOS Internet additions. Verizon also added 4.5 million wireless customers in 2013. All of these additions should allow Verizon to build on the $22.2 billion in free cash flow it generated just last year.

Amazingly, Verizon produced 45% growth in free cash flow last year versus the previous year.

Based on Verizon's roughly 4.1 billion shares outstanding, the company generated approximately $5.36 per share in free cash flow last year. When you consider Verizon's annualized dividend stands at $2.12 per share, it becomes abundantly clear how strong its business really is. Verizon's free cash flow payout ratio, which measures how much of its free cash is distributed to investors via the dividend, stands at just 39%.

Also, Verizon's free cash flow payout ratio is measurably better than AT&T's, which stands at 71%.

Such a low payout ratio not only means Verizon can easily afford its current payout, but it also means the company should have no trouble granting investors another solid dividend bump this year.

The Foolish takeaway
Investors depend on telecommunications companies for high dividends, and if that's your aim, Verizon won't disappoint you. It's made huge investments in acquiring Verizon Wireless and building out its fiber optic network, both of which will pay off going forward. Verizon has had to incur a fair amount of debt to finance these initiatives, but the huge free cash flow generated by its various businesses means its 4.3% dividend is extremely safe.

Future dividend growth is likely, too, thanks to Verizon's low payout ratio and prospects for future growth of free cash flow.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Bob Ciura owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers