Verizon Communications (VZ +2.07%) pays an incredibly high yield of 6.6% right now. This is not your typical yield from Verizon. But because investors turned bearish on the stock amid rising interest rates, the stock has fallen, and the yield has risen.
When a yield gets this high, question marks often arise as to whether it is too good to be true, and whether it can really be safe. Let's take a closer look to see just how manageable the payout is for Verizon, and whether now is a good time to buy the stock.
NYSE: VZ
Key Data Points
Verizon's free cash flow has improved this year
An important number for dividend investors to focus on when looking at a dividend stock is the company's free cash flow. This tells investors just how much operating cash flow is left after paying for capital expenditures. Whether a company wants to reinvest into its operations, pursue acquisitions, or pay a dividend, it needs to have strong free cash flow in order to do that.
Verizon recently reported its second-quarter earnings. For the first half of 2024, the company's free cash flow totaled $8.5 billion, which is higher than the $8 billion it reported during the same period a year ago. That's a positive sign for investors, as the company typically pays around $2.8 billion in dividends during a quarter, or $5.6 billion during half a year. Based on that figure, Verizon is paying out approximately 66% of its free cash flow as dividends, which appears to be sustainable.
No big warning signs to suggest the dividend is in trouble
In Verizon's earnings report, there wasn't anything to imply that the dividend could come under pressure. Instead, it was business as usual with Verizon steadily growing its top line. The company also said it was on track to meet its guidance for the year, which called for wireless service revenue growth of between 2% and 3.5%.
The company is still growing, albeit steadily, and adding more customers in the process. Verizon's earnings per share of $1.09 for the quarter, which ended in June, was relatively similar to the $1.10 per-share profit it reported a year ago.
It was a largely uneventful quarter for the stock, but that is great news for investors who just want a dividend investment that they don't need to worry about. Verizon's payout ratio looks high at more than 100% of earnings, but that's due to a non-cash $5.8 billion writedown the company incurred a couple of quarters ago relating to its wireline business.
Is Verizon's stock a buy?
Verizon's stock is up 6% this year, but it's still trading at a very low valuation -- just 9 times its estimated future earnings, based on analyst expectations. With Verizon, investors are getting a top telecom stock at an attractive discount, and it's definitely worth adding it to your portfolio today. As interest rates come down and dividend stocks become more attractive for their high yields, a stock like Verizon could quickly become a popular investment again.
But rather than waiting for that to happen, investors may want to consider loading up on the stock now, to help secure a lower price for it. Verizon's business looks sound, and with more potential growth opportunities coming as people upgrade their devices now that new phones with artificial intelligence capabilities are coming, it could look like a bargain buy in a few years.
