Verizon offers dividend investors a chunky 4.8% yield, has raised its payout annually for 11 years running, and is posting earnings that are enough for the company to cover its current dividend distribution roughly three times over. Those qualities are likely to pique the interest of income-focused investors -- but there are other companies worth considering that offer higher yields and other attractive qualities.
We asked three Motley Fool investors to identify three stocks that currently top Verizon when it comes to returning value to shareholders. Read on for a look at what GlaxoSmithKline (GSK -0.83%), AT&T (T 1.30%), and Apple (AAPL -0.57%) have to offer.
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An even bigger yield in telecom
Keith Noonan (AT&T): If you're looking for big yield in the telecom sector, Verizon's package is very attractive, but rival AT&T has it beat. Shares yield 6.3% at current prices, and the company's 34-year streak of rewarding shareholders with an annual payout increase has established a standard that the company is likely to continue building on.
The market appears pretty nonplused with the company's recent legal victory in its bid to acquire Time Warner -- the telecom giant's shares are down roughly 7% since the favorable ruling. That's likely due to the fact that the $85.4 billion deal will add to AT&T's already substantial debt levels.
However, I think that judicial approval of the deal will open up crucial opportunities and bodes well for the company's long-term future. With the relatively recent strengthening of service packages from Sprint and T-Mobile, the entrance of Comcast into the wireless service space, and looming threats that tech giants like Alphabet and Facebook pose to existing telecom players, AT&T's ability to distinguish its offerings through bundles has become more important than ever.
The Time Warner acquisition brings channels like CNN and HBO into AT&T's corporate fold, and the company has already made a skinny bundle of channels available to its unlimited wireless subscribers at no additional charge. If that sounds like a move that might undercut the value of Time Warner channels, it's worth keeping in mind that management expects that the individually tailored nature of mobile advertising could help it command advertising rates that are between two and three times higher than through cable. It also makes AT&T one of the world's leading entertainment producers at a time when strength in content is becoming increasingly important as a way to distinguish and support tech platforms.
With the company now firmly established as a leader in film and television, and growth opportunities like 5G peeking over the horizon, AT&T stock looks like a worthwhile buy trading at roughly nine times this year's expected earnings.
Pharma's richest payout
George Budwell (GlaxoSmithKline): With a yield of 4.8%, telecom-giant Verizon offers one of the richer dividends in the large-cap stock universe. But GlaxoSmithKline, a top biopharmaceutical company, comes in even higher at a lofty 5.1%. In fact, Glaxo currently sports the most generous payout in all of pharma right now.
Is this super-high-yield dividend stock worth owning? I think the answer is "maybe."
The backstory is that Glaxo currently is going through a transitory period sparked by a change in management at several levels, a process that kicked into high gear with the hiring of CEO Emma Walmsley in 2017. So far in her tenure, Walmsley has pruned the company's inefficient clinical pipeline, replaced numerous top executives, and executed a sizable acquisition of Novartis' consumer-healthcare segment.
Her clearly stated goals are to reduce clinical trial costs, re-center the pharma pipeline around high-value areas like vaccines, HIV, respiratory, and oncology medicines, and stabilize the company's top line by growing a larger footprint in the less risky consumer-healthcare space.
The good news is that this restructuring process is expected to result in Glaxo becoming the top vaccine company in the world by 2024 and make it second to only Gilead Sciences in the realm of HIV drug sales over this same period. The bad news is that Glaxo's pivot toward the less profitable area of consumer healthcare won't produce the level of growth necessary to keep its dividend program afloat at current levels.
Briefly, Glaxo's management has been reticent to slash the company's ultra-high dividend, even while it slogs through this long-tailed turnaround process. While that approach has been a boon for income investors, the company's juicy dividend no long appears sustainable based on its enormous payout ratio of 384% and only modest growth prospects going forward.
That being said, Glaxo has yet to reveal its plans for its dividend program past this year, and there's a shot that management will kick the can down the road on this issue, yet again. If you're looking for a high-yield stock and are comfortable with the fact that it might not be sustainable beyond 2018, Glaxo might be worth checking out.
High-tech and high return
Nicholas Rossolillo (Apple): The iPhone-maker's stock has produced huge gains for shareholders over the years, but it isn't exactly known for its dividend. So why is it on this list? It's because of its share repurchase program.
During the last-reported quarter, Apple announced both a 16% hike to its dividend, as well as a new $100 billion share repurchase program. After the pay raise, the forward 12-month dividend yield is currently 1.6%, well below what you'd get from Verizon. However, that new share repurchase program is worth over 10% of the company's total valuation as measured by current enterprise value.
When a company has excess cash it would like to return to shareholders, the obvious choice is to pay a dividend. That puts the payday firmly in the possession of owners of the stock. A drawback, though, is the dreaded double tax: Profits are taxed at the corporate level, which are taxed again via the ordinary income tax rate when individuals receive their dividend payment.
A share repurchase is another option. Instead of distributing excess cash, a company can choose to purchase its own shares. All else being equal, that improves the earnings-per-share figure in subsequent quarters, which typically will raise share prices. Corporate tax still is paid, but shareholders essentially defer the tax on their distributions, instead paying a capital gains tax when they sell their shares later on -- which in many cases is a lower rate.
Thus, if Apple uses up its new authorization to purchase $100 billion-worth of its own stock in the next couple of years, that's essentially a better distribution yield than what Verizon is paying. And all of that from Apple, a business that continues to grow by double digits each quarter via an iPhone segment that's still going strong and new services revenue.
