Verizon (VZ -0.85%) stock has experienced struggles amid slow growth and high costs to deploy its 5G network. However, one area where Verizon has shined is in maintaining a growing, high-yield dividend. Although competition in the 5G market will likely require massive investments and continuous improvements, the company should continue to generate the cash flow needed to maintain and increase the payout. Here's why.
The Verizon dividend
Verizon has paid a dividend since before it began operating as Verizon in 2000. Today, shareholders receive $0.6275 per share every quarter, or $2.51 per share annually. At today's price, that amounts to a cash return of just over 4.3%, more than triple the S&P 500's average cash yield of around 1.4%.
In 2020, Verizon generated $18.3 billion in free cash flow when including spectrum and acquisition costs. This came in well above the payout costs of just over $10.2 billion. These cash flows leave Verizon well-positioned to maintain and increase this payout.
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Moreover, beginning in 2007, the company also started approving annual payout hikes, a practice that continues today. In past years, the company has announced dividend increases in September. Assuming the company maintains or increases the payout, 2021 will mark the 15th year of annual payout hikes.
If Verizon passes 11 more annual dividend hikes, it will also attain Dividend Aristocrat status. Verizon would likely then attract the interest of Dividend Aristocrat funds and other investors based on this distinction.
Why current financials do not threaten the payout
Even if it never becomes an Aristocrat, Verizon's financials such as its top and bottom lines appear set to help sustain the payout and its growth. In the first quarter of 2021, revenue increased by 4% from year-ago levels. Since the company limited the increase in operating expenses to 0.3% and boosted income from sources unrelated to core operations, net income came in 25% higher.
One quarter does not constitute a trend. Nonetheless, this report is welcome news considering that revenue and earnings both fell throughout 2020.
Indeed, some financial metrics could cause some concern. In a bid to speed up service, Verizon more than doubled its existing mid-band spectrum in a recent auction. For the user, this means faster 5G service than the company offers through its 5G Nationwide plans. This is especially important for its business customers, who pay a premium for faster, more robust service.
However, the spectrum purchases during the quarter cost Verizon $45 billion. To help cover this cost, Verizon raised $31 billion in financing in March and $12 billion in the fourth quarter. This takes the net unsecured debt to $137.4 billion. As a company worth only $72.7 billion after subtracting liabilities from assets, this might worry some income-oriented stockholders.
Still, this took the quarterly interest expense to only $1.1 billion. With $2.6 billion in free cash flow left over after paying dividends, the company can continue to service its debt.
5G and its potential revenue sources
Another factor bolstering the dividend is the advent of 5G. Along with AT&T (T -0.92%) and T-Mobile (TMUS -0.02%), Verizon is only one of three companies offering nationwide 5G service in the U.S.
Moreover, in its latest earnings report, Verizon announced it had accelerated 5G growth. Today, its 5G Nationwide service now extends to more than 2,700 markets.
Thanks to the recent spectrum purchase, Verizon can now improve its competitive advantage by entering the network-as-a-service business. In its Q1 2021 earnings call, Chairman and CEO Hans Vestberg mentioned a partnership with Amazon's AWS to help enhance edge computing through 5G. Verizon has also announced a partnership with Honda to bolster autonomous driving.
Thanks to such enhanced capabilities, 5G brings in new sources of revenue that did not exist under the old 4G standard. Such opportunities could not only boost Verizon stock but also lead to rising cash flows and a more robust dividend.
Verizon brings yield and dividend safety
Verizon can maintain and increase its payout as it faces intense competition and massive costs in building out 5G. Thanks to this investment, Verizon has continued to produce strong cash flows, and even the enormous spectrum investment has yet to threaten the payout. As the company develops new revenue sources through 5G, the telecom stock's dividend appears on track to grow in stability and size in the coming years.
