Verizon's (VZ 1.17%) dividend currently yields more than 6%. That puts the telecom giant's payout among the highest yields in the S&P 500, where the average is 1.5%.
However, while a higher-yielding payout often indicates a higher risk of a future reduction, that's growing increasingly unlikely for Verizon. That's clear in the company's financial results from last year and outlook for 2024.
A free-cash-flow machine
Verizon recently reported its fourth-quarter and full-year results for 2023. On the one hand, the telecom giant reported declining revenue and earnings in both periods. Here's a snapshot of its income statement for the fourth quarter:
As that graphic shows, Verizon's total revenue dipped 0.3% during the period. Meanwhile, it posted a massive $2.6 billion net loss.
However, those numbers don't even begin to tell the whole story. While Verizon reported a loss for the period, that was entirely due to several non-cash charges, including a $5.8 billion goodwill impairment charge for its business reporting unit. Strip away those one-time items, and Verizon posted a profit for the period and full year, albeit at a lower rate compared to 2022.
While Verizon's revenue and earnings were lower, its cash flow improved. Cash from operating activities increased by $400 million last year to $37.5 billion. Meanwhile, Verizon used $18.8 billion of that money to fund capital expenses, which was $4.3 billion less than in 2022. That enabled Verizon to produce $18.7 billion of free cash flow last year, a $4.6 billion improvement. This amount easily covered Verizon's $11 billion dividend outlay, enabling it to produce $7.7 billion in excess free cash.
The company used that money to strengthen its balance sheet. That enabled it to reduce its leverage ratio from 2.7 times at the end of 2022 to 2.6 times at the end of last year. The company's growing free cash flow and falling leverage ratio help support its solid credit rating (A-/BBB+/Baa1). Those factors also mean its high-yielding dividend is on an even firmer foundation.
More improvement ahead in 2024
Last year was a "year of change" for Verizon, according to comments by CEO Hans Vestberg in the fourth-quarter earnings release. He noted that the company "deliver[ed] continuous improvement throughout 2023" and "we ended the year strong and continue to pursue the right balance of growth and profitability." That drives his belief that Verizon has "the right assets and the best team in place and are well-positioned for growth in 2024."
The company expects total wireless service revenue to rise by 2% to 3.5% next year, building on its solid results from last year when this revenue source increased by 3.2%. Meanwhile, Verizon expects its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to improve by 1% to 3% in 2023 after falling 0.2% last year.
While the company didn't provide cash flow guidance for 2024, those metrics should also improve. Verizon's growing revenue and adjusted EBITDA should trickle down to its operating cash flow, which should continue rising this year. Meanwhile, free cash flow should be strong because the company expects capital spending to fall to a range of $17 billion to $17.5 billion this year. As a result, it should generate lots of free cash flow after paying dividends this year to strengthen its balance sheet.
Because of that, the company should have the flexibility to continue increasing its payout. It raised its dividend by around 2% last September, marking its 17th straight year of increasing the payout. That maintained the longest current streak of dividend increases in the U.S. telecom sector.
Getting safer by the quarter
Verizon's big-time dividend is on an increasingly firm foundation. The telecom giant is producing rising free cash flow as capital spending falls, giving it more money to strengthen its already solid balance sheet. With more improvement expected in 2024, Verizon is an excellent option for investors seeking a lower-risk, high-yielding dividend.
