Shares of Verizon (VZ -0.24%) have fallen more than 25% over the past year. I've been steadily buying that dip to boost my position. The main driver is Verizon's high-yielding dividend. With shares falling, the telecom giant's dividend yield has risen to more than 7%.
Here's why I believe that dividend is safe, and that the stock will eventually reverse its slide.
The big-time payout is on a firm foundation
Verizon has one of the highest dividend yields among S&P 500 members. While a high dividend yield is usually a warning sign that the market believes a cut is forthcoming, I believe Verizon's payout will continue growing. Its strong, improving free cash flow and falling leverage ratio drive that view.
Here's a snapshot of its cash flow statement over the last 12 months:
Metric |
Trailing 12 Months |
---|---|
Cash flow from operations |
$38.6 billion |
Capital expenditures |
$23.3 billion |
Free cash flow |
$15.4 billion |
Dividends paid |
$10.8 billion |
Post-dividend free cash flow |
$4.6 billion |
As that table shows, Verizon generates more than enough cash to cover its capital expenses and dividend payments. During the first quarter of this year, operating cash flow grew by 22% to $8.3 million, while free cash flow surged 130% to $2.3 billion. That allowed it to produce some excess cash to strengthen its already solid balance sheet.
Verizon ended the first quarter with a net leverage ratio of 2.7 times, down from 2.8 times in the year-ago period. While that's higher than the company's target, it supports its strong investment-grade bond ratings (A-/BBB+/Baa1). The company's improving free cash flow and leverage ratio put its big dividend on an even firmer foundation.
Getting even stronger
Verizon has been investing heavily to build out its 5G network capabilities. That has included spending $10 billion for additional C-Band spectrum. During the first quarter, the company funded most of the remaining $1.75 billion under its C-Band-related spending program.
With that additional spending in the rearview mirror, Verizon's capital spending will fall, increasing its free cash flow. The company estimates 2023 capital spending will be between $18.3 billion to $19.3 billion, down from $23.1 billion in 2022. Meanwhile, it sees next year's spending level falling to around $17 billion, down $5 billion from 2022's level. That will give the company a lot more free cash flow to support the dividend and reduce leverage.
Meanwhile, operating cash flow should also continue to rise. Its growth-related investments should increase earnings. In addition, the company launched a new cost-cutting program last year to reduce its annual costs by $2 billion to $3 billion by 2023. These catalysts should grow its earnings and improve its margins, enabling the telecom giant to generate more cash.
Verizon plans to plow all its post-dividend free cash flow into reducing leverage in the near term. The company's long-term target is to get leverage down to 1.75-2.0 times. However, Verizon said it would resume repurchasing shares once leverage falls below 2.25 times.
That deleveraging plan won't preclude Verizon from continuing to grow its dividend. The company increased its payment for the 16th straight year in 2022, the longest current streak in the U.S. telecom sector. With its free cash flow and balance sheet improving, it should continue increasing the dividend.
Verizon's growing earnings, increasing free cash flow, rising dividend, and falling leverage ratio should eventually drive its share price higher.
Excellent income with upside potential
Verizon pays a big-time dividend that's on an increasingly secure foundation. That provides a nice base return. In addition, I think the stock has upside potential as its cash flow grows and leverage ratio falls. That income and upside potential are why I continue to buy the dip in Verizon stock.