Verizon (VZ 0.49%) has one of the highest dividend yields in the S&P 500 at over 6.5%. That puts it several times above the index's level of 1.3%. The concern is that a high dividend yield often signals that the payout is at a higher risk of reduction.
However, that's not the case for the telecom stock's dividend. It's on an increasingly sustainable foundation, which has been on full display this year. Here's a look at the factors driving this view.
NYSE: VZ
Key Data Points
Improving where it matters most
Verizon recently reported its second-quarter results. The telecom giant delivered accelerated wireless service revenue growth and double-digit broadband subscriber growth. That helped nudge up its total revenue by 0.6% while its adjusted EBITDA rose 2.8%.
Despite that growth, Verizon's operating cash flow fell from $18 billion in the first half of last year to $16.6 billion in the first half of 2024. However, that gave the company plenty of cash to fund its capital expenses, which declined by $2 billion to $8.1 billion in the first half of the year. That enabled Verizon to generate $8.5 billion of free cash flow, a $500 million, or nearly 7% increase. With the company's first-half dividend outlay at $5.6 billion, Verizon covered its payout with ample room to spare.
Verizon used its growing excess cash to strengthen its balance sheet. Its net debt has declined by $3.1 billion over the past quarter and $6.1 billion in the last year. That has helped lower its leverage ratio from 2.6 in the first half of last year to 2.5 at the end of 2024's first half. That solid and improving leverage ratio supports the company's strong investment grade-rated balance sheet.
More improvement ahead
Verizon expects further improvements in the coming quarters. CEO Hans Vestberg stated on the second-quarter call, "Our focus for the second half remains clear: to drive growth in wireless service revenue, expand adjusted EBITDA, and generate strong free cash flow." That strong free cash flow will enable the company to continue "supporting our dividend and paying down debt," according to Vestberg.
The company's long-term target is to get leverage down to 1.75 to 2.0, further strengthening its already strong balance sheet. Its near-term focus is to use all its excess free cash after paying dividends to reduce debt. However, the company has said it would consider initiating a share repurchase program once its leverage ratio drops below 2.25. While it's on track to get down to that level next year, hitting that leverage level won't necessarily trigger a buyback. Vestberg stated on the call that many factors would come into play, including interest rates, the share price, and its growth investment opportunities. For example, if interest rates remain elevated, Verizon might opt to continue paying down debt to keep interest expenses at bay.
Verizon's strong, growing free cash flow and improving leverage ratio put its high-yielding dividend on an even stronger long-term foundation, and it should have no problem continuing to increase its payout. Last year was Verizon's 17th consecutive year of increasing its dividend, the longest current streak in the U.S. telecom sector. Vestberg stated on the second-quarter call that it's his job to put the company in the position to continue increasing its payout, which he's certainly doing.
A sustainable and steadily rising payout
Verizon's high-yielding dividend is on a strong and steadily improving foundation, and the company should be able to continue increasing its payout. That makes it an excellent option for those seeking an attractive and steadily rising passive income stream.
