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More Proof Verizon's Dividend Is a Safe Bet

By Nicholas Rossolillo - Feb 4, 2018 at 1:21PM

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The bears looked like they were winning at times last year, but the leader in U.S. wireless was never really at risk.

For Verizon (VZ -2.17%), things in 2018 have started on a different footing than they did in 2017. The company had a great fourth quarter to finish the year and provided a rosy outlook for the new year. In spite of question marks, the company has proved it is a best-in-class dividend payer for investors to rely upon.

What happened?

This same time last year, Verizon reported its first decline in net subscriber additions in the 4G network era. Smaller competitors undercut the wireless leader with cheaper rates and new unlimited data plans. The company was reluctant to jump on the unlimited train but finally did so early in the year.

Operating revenues were hit-and-miss during the transition, but the company showed the power of having the "biggest and best" wireless network. Customers flocked back to the fold throughout the year, totaling nearly 1.2 million net additions in the fourth quarter alone.

A bar chart showing over 2 million net subscriber adds in 2016, followed by a 300,000 drop in Q1 2017. Additions have been on the rise ever since then, topping 1 million in Q4 2017.

Chart by the author. Data source: Verizon quarterly earnings.

As a result, full-year 2017 revenues ended flat from last fiscal year, with the fourth quarter's 5% gain bailing out what would have otherwise been a 12-month decline. All of that is great news, but Verizon had something especially good to report for those who own the stock for the dividend: Earnings per share were up 129%, getting a big one-time tax reform boost.

Four young people standing against a red wall looking at smart phones.

Image source: Getty Images.

Why Verizon is a Dividend Aristocrat

As part of the new tax law just passed, the corporate tax rate has been reduced to 21%. Because of that, Verizon announced a one-time tax benefit of about $16.8 billion. The benefit is good for nearly two years' worth of dividend payments at the current annualized rate of $2.36.

In addition, the new tax rates improve the company's cash flow from operations by $3.5 billion to $4 billion each quarter in the year ahead. Quarterly operating cash flow averaged over $6 billion last year, so that's a better than 50% increase from tax reform. That is likely to help the company's free cash flow -- money left over after operations are paid for -- continue to improve.

VZ Free Cash Flow (TTM) Chart

Data by YCharts.

That's great news considering the 4G wireless business continues to get less lucrative. Profit margins are falling as telecom companies duke it out for a limited pool of subscribers in the U.S. New perks are being added to plans, and pricing is in slow decline from new upstarts cutting prices to steal customers. The increased cash flow gives Verizon some breathing room to weather that storm, keep its dividend payments safe, and invest in future lines of business.

Speaking of investments, Verizon has been busy in that department the last couple of years. It has a media division called Oath (which includes the acquired Yahoo! and AOL online brands) that it continues to build new digital content around, Internet of Things businesses, and a new 5G wireless network that will have initial roll-out later this year starting in Sacramento, California.

Those investments are only just beginning to pay off and are still a small fraction of Verizon's total business. In the years ahead, that could change drastically, adding new revenue to supplement the wireless segment. That gives investors a lot of reasons to feel confident about Verizon and the future of that lucrative dividend payout.

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