It's been a great year for Verizon Communications (NYSE:VZ) and its investors. The smartphone boom is in full swing, and Verizon's racking up impressive growth.
This success is partly due to Verizon's major strategic initiative to buy out the remaining stake in Verizon Wireless that it didn't already own. The decision to own the whole wireless business has proven to be a wise one, because Verizon Wireless is the largest and most profitable wireless carrier in the United States.
To reflect its success, Verizon shares a large percentage of its profits with investors through its high dividend yield, sitting around 4.5% currently. Even better, Verizon has increased its dividend on an annual basis every year since 2006. Earlier this month, Verizon announced a solid dividend raise -- increasing the quarterly payout to shareholders 3.8%, from $0.53 per share to $0.55 per share. Investors are about to get even more cash in their pockets going forward.
Verizon is sitting on a gold mine
Verizon paid $130 billion to European telecom giant Vodafone (NASDAQ:VOD) to acquire the 45% stake in Verizon Wireless that it didn't already own. That deal was completed in February. A negative aspect of the deal was that it saddled Verizon with a huge amount of debt. In fact, Verizon's latest financial statements reveal it has approximately $107 billion in long-term debt on the balance sheet. To help finance the acquisition, Verizon sold $49 billion worth of bonds in the largest corporate bond deal ever. This explains Verizon's bloated financial position at the present time.
However, the benefits of the acquisition are clear. This was a great move, because wireless is outperforming Verizon's overall results. Verizon produced 5% growth in total revenue last quarter, and 24% growth in adjusted earnings, and Verizon Wireless led the way. Continued earnings growth will allow the company to pay down its hefty amount of debt. In addition, Verizon took advantage of the low interest rate environment to secure debt that was not overly expensive.
Last quarter, Verizon Wireless added 1.4 million net retail connections, and increased retail service revenue by 5.3%. The wireless business also increased EBIDTA margin to more than 50%. This helped Verizon to post double-digit growth in year-over-year EPS in nine out of the last 10 quarters.
Going forward, management is confident about the remainder of the year. The company expects at least 4% revenue growth, which seems like a conservative forecast because the company's growth has exceeded that number throughout the first half of the year.
Verizon's dividend deserves your attention
Thanks in large part to its hugely successful wireless business, Verizon generates a lot of cash flow. The company produced $6.3 billion in free cash flow during the first six months of the year. In turn, Verizon shares a lot of its profits with investors through a very competitive dividend. During the first six months, Verizon distributed just 56% of its free cash flow in dividends.
This payout ratio leaves a comfortable amount of room to regularly increase the dividend. That's how Verizon was able to up its quarterly payout by 3.8%, to $0.55 per share, this month. Verizon has now come through with dividend increases for eight years in a row. The latest represents a $2.20-per-share annual dividend, which provides investors with a hefty 4.5% yield based on the stock's Sept. 10 closing price.
Future annual dividend increases are extremely likely, thanks to Verizon's prodigious cash flow. Even with the recent bump, Verizon still distributes well below two-thirds of its free cash flow to investors. This should provide plenty of room for further increases.
Verizon has increased its dividend by 4.3% compounded annually during the past five years. As Verizon Wireless continues to grow, Verizon should have no trouble handing out regular dividend increases at or above its historic averages in recent years.
The main takeaway for investors is that Verizon announced a nice dividend increase this month, thanks to its strong underlying financial results during the first half of the year. It is growing revenue at a satisfactory rate, and earnings are significantly higher, thanks to the benefits of having the entire wireless segment in tow.
If you're an income investor, Verizon and its 4.5% yield deserve your consideration.
Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Vodafone. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.