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Verizon's 4.4% Dividend Yield Remains One of the Best in Tech

By Nicholas Rossolillo – Oct 24, 2020 at 12:00PM

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Third quarter earnings were decent, and the quarterly payout is still generous.

Though shares have turned in an unimpressive negative 6% return this year, Verizon's (VZ -0.77%) business has been a stable staple. That was on display once again in Q3 2020, with net new wireless subscriber additions and the highest rate of Fios Internet additions since 2014. But the big news -- another double-digit percentage increase in free cash flow -- underpins the real reason to own this stock: the 4.4% dividend yield. 

A city skyline with a bubble that has "5G" in hovering above.

Image source: Getty Images.

Wireless is a modern necessity

New 5G wireless networks have been all the rage this year, and on this front Verizon trails behind T-Mobile (TMUS -1.20%) in terms of national coverage. However, its 4G LTE network outperforms other carriers' new 5G in average performance.

It shows in the numbers. Verizon added net 136,000 retail postpaid connections on the consumer side, net 417,000 retail postpaid connections in the business segment, and net 144,000 Fios Internet additions across consumer and business lines. Verizon Media revenue -- comprised of the old AOL and Yahoo! assets acquired a few years ago -- fell 7% to $1.7 billion on continued declines in internet advertising, although the segment did rebound 21% from Q2 during the height of the pandemic lockdown. 

Overall revenue fell 4% from a year ago to $31.5 billion, with lower device sales blamed as the primary culprit. Apple (AAPL 2.44%) in particular delayed its annual iPhone release from September to October this year, likely the main reason for Verizon's lower equipment sales. Nevertheless, adjusted earnings still came in flat compared to a year ago, and the outlook for full-year 2020 adjusted earnings was upgraded to flat-to-up-2% compared with 2019 (the previous outlook was down 2% to up 2%). This includes management's call for capital expenditures -- which includes buildout of 5G -- to be near the top of the $17.5 billion to $18.5 billion range previously given.

On the balance sheet, long-term debt was $110 billion (compared to $101 billion at the start of 2020), and cash and equivalents ended September at $9.0 billion ($2.6 billion at the beginning of the year) -- although those figures do not reflect the pending $6.9 billion acquisition of TracFone. Especially after its (ill-advised, in my opinion) purchase of the media business, Verizon remains far less nimble than T-Mobile. However, this is still a very profitable enterprise that generates ample cash to service its debt, build next-gen 5G services, and make that dividend payment to shareholders. 

The metric that really counts

Verizon said its free cash flow -- operating cash flow minus capital expenditures -- increased 27% from a year ago to $18.3 billion through the first nine months of 2020. When further subtracting out acquisitions of businesses and wireless licenses (the wireless spectrum that carries voice and data signals, including for 5G), free cash flow was $15.8 billion through the first nine months of the year, up 12% from the same period in 2019. 

This is significant, as these figures include Verizon's spending on never-ending network improvements and construction in support of the 5G arms race. This leftover cash handily covers the $7.6 billion paid out in dividends so far in 2020. If it's income you seek, this makes Verizon's 4.4% yield the best in class of America's telecom companies, as the company can dole out income plus continue to invest in its leading wireless network. 

5G networks won't transform this into a growth company, but Verizon looks like a real value at just 11.3 times 12-month trailing free cash flow. Paired with the dividend payment, this is a top dividend stock in the tech universe.

Nicholas Rossolillo owns shares of Apple and Verizon Communications. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.

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