Shares of Verizon (VZ 1.17%) have been under a lot of pressure in recent years over concerns that its heavy investments in 5G could cause its financial profile to deteriorate. That caused a weight of worry the telecom giant might need to cut its dividend, which has driven its yield up to 7.7%.

However, those concerns seem unfounded. Verizon's second-quarter results showcased that its investments in 5G are starting to pay off. They also highlighted that the company's dividend is on an increasingly improving financial foundation.

Improving where it matters most

At first glance, Verizon's second-quarter results might seem a bit underwhelming. Revenue declined by 3.5% from the prior year period to $32.6 billion. Meanwhile, adjusted earnings fell from $1.31 to $1.21 per share. 

However, there were some significant silver linings to the quarter. The company's wireless service revenue increased by 3.8%, driven by strong consumer postpaid phone subscriber growth of 6.9% as its investments in 5G are starting to pay off. That surprised Wall Street analysts following the company, who expected that it would lose subscribers to lower-cost rivals like T-Mobile in the quarter. 

Meanwhile, Verizon's cash flow improved during the year's first half. Cash flow from operations increased by about 2% to $18 billion. That provided the telecom giant with enough money to cover capital expenses (which declined by 4% to $10.1 billion) and dividend payments ($5.5 billion) with room to spare ($2.5 billion). 

Verizon's growing excess free cash flow helped strengthen its already solid balance sheet. The company ended the first half with a net leverage ratio of 2.6 times, down from 2.7 times in the year-ago period. That supports Verizon's strong bond ratings of A-/BBB+/Baa1.

Hitting the inflection point

Verizon's excess free cash flow should continue growing from here. The company wrapped up its C-band spending program to enhance its 5G network in the first quarter, funding the final roughly $1.8 billion of its $10 billion commitment. As a result, capital spending has come down considerably. After spending $6 billion in the first quarter, Verizon's capital spending was $4.1 billion in the second quarter.

For the full year, Verizon expects capital spending to range between $18.3 billion and $19.3 billion, about $4 billion to $5 billion less than last year. Meanwhile, it sees capital spending falling to around $17 billion next year. 

That has the company on track to generate significantly more excess free cash flow in the coming quarters even if operating cash flow doesn't grow. However, as Verizon showed in the first quarter, its 5G-related investments are starting to pay dividends by enhancing its margins and operating cash flow. Meanwhile, the company is also working to reduce costs by $2 billion-$3 billion by 2025 to further enhance cash flow. 

Verizon's growing excess free cash will enable it to continue paying down debt. Add in earnings growth, and its leverage ratio should continue declining steadily. That strengthening balance sheet would put Verizon's dividend on an even firmer long-term foundation. It should enable the telecom giant to continue increasing its dividend as it has for the last 16 consecutive years. 

All of this assumes the company doesn't face any significant near-term liabilities from potential lead cable exposure. Verizon believes lead-sheathed cables only comprise a small portion of its telecom network. Meanwhile, even if it did need to replace all those cables, the costs likely wouldn't be too high (one estimate suggests it could range between $1.7 billion and $4.1 billion), and it would probably be able to spread them out over many years. 

Verizon's dividend is looking increasingly sustainable

Verizon recently finished funding the rest of its C-band spending program to enhance its 5G capabilities. Now capital spending has declined, freeing up more cash flow. Meanwhile, its 5G-related investments are starting to boost its results, further improving its cash flow. That's allowing Verizon to deleverage its already solid balance sheet, putting it in an even stronger financial position. In short, the company's big-time dividend looks safe, making it look like an attractive option for income-seeking investors.