Investors seemingly lack confidence in Verizon Communications (VZ -0.47%). The U.S. telecom giant's share price is down 25% over the past decade.
What's to blame? It seems the lack of meaningful growth is the culprit. Earnings per share (EPS) have been roughly flat over the past eight years, and analysts don't have high expectations for the coming years.
But Verizon's whopping 7.5% dividend yield could appeal to investors more interested in passive income than maximizing total investment returns. The big question is whether investors can trust Verizon to keep paying shareholders.
Does the stock's decline signal financial trouble within Verizon? Here is what dividend investors need to know.
Verizon's wireless business has struggled
A few companies control the wireless telecom space in the United States, but the industry is still pretty competitive. Verizon's been a mixed bag over the past several quarters. While the company is adding enterprise accounts and growing its broadband customer base, it's steadily losing wireless consumer accounts. Verizon acquired TracFone in 2020, which came with 20 million customers, so losing hundreds of thousands of those customers isn't great.
Image source: Verizon Communications.
Consumer losses are stunting Verizon's revenue, which fell 3.5% year over year in the second quarter. A low-single-digit revenue decline isn't necessarily a crisis, but it underlines Verizon's uphill battle to grow. Unfortunately, many consumers don't seem to have much loyalty to a carrier as long as they have access to new devices (they all have that) and reliable service in their location.
Verizon will eventually need to figure out how to turn the tide in its consumer wireless business; its losses have been AT&T's gains for some time now.
The balance sheet has a lot of debt
Verizon's stock was declining long before the company's recent losing streak in its consumer wireless segment, so why might the stock be struggling? Investors can look no further than the company's balance sheet. Verizon's long-term debt has steadily increased for a decade and now sits at $152 billion.
VZ Cash and Short Term Investments (Quarterly) data by YCharts
This is problematic for multiple reasons. First, Verizon's interest expenses will grow as it refinances its debt at higher rates. Interest expense drains a company's profits, another hurdle to growth in addition to sinking revenue.
Additionally, there is so much debt that Verizon doesn't have a lot of financial flexibility left. The company's debt-to-EBITDA ratio is just over 3; I like to see this ratio lower, though it's not so high that Verizon's business is unstable. It just limits the moves it can make to invest in growing its business.
But is the dividend safe?
Despite these growth and balance sheet concerns, the dividend does appear to be on solid footing. The dividend costs Verizon approximately $2.75 billion per quarter, or $11 billion annually. The company is making about $37 billion in operating profits and will spend just under $20 billion on capital investments (maintaining its network, etc.) this year.
That leaves enough cash flow to pay the dividend with about $6 billion left over, which management can put toward paying down debt. Despite the problems noted, it would probably take a substantial decline in the business to eat up that $6 billion buffer and force a dividend cut.
VZ Cash from Operations (TTM) data by YCharts
So, Verizon is a safe, high-yield investment idea for the right investor. However, it would probably be someone who cares about the dividend and little else. The company's ongoing struggles with losing consumer subscribers and a bloated balance sheet create a mediocre outlook for growth that should have most investors looking elsewhere for investment returns.
