Telecommunications giant Verizon Communications (NYSE:VZ) is about to put a nice chunk of change in its investors' pockets. The company declared its most recent quarterly dividend, which will be payable on November 3 to shareholders of record on October 10. Even better, Verizon is about to put even more money in its shareholders' pockets than it had previously this year. That's because Verizon increased its quarterly dividend, to $0.55 per share, up 3.8% from its previous level of $0.53 per share.
Verizon's new annualized payout of $2.20 per share represents a solid 4.4% yield. This year marks the eighth in a row in which Verizon has raised its dividend.
Here are the relevant details that investors need to know, regarding Verizon and its dividend.
Balance sheet is bloated, but cash flow is growing
At first glance, Verizon might not seem like the type of company that can afford to raise its dividend, judging by its financial condition alone. The company carries a massive amount of debt that looks like a scary proposition for dividend increases. For example, at the end of the last quarter, Verizon held $107 billion in long-term debt, an increase of $18 billion over the previous six months. The company had just $5.7 billion in cash and equivalents on the books as of June 30, down significantly from $53 billion at the end of 2013.
Even so, Verizon managed to pass along a greater dividend increase than it did last year. Verizon's 2013 dividend bump was just 2.9%, to $0.53 per share paid quarterly. The reason why Verizon can afford to accelerate its dividend growth is that the asset it acquired, the remaining stake in Verizon Wireless that it didn't already own, is a cash machine.
When Verizon made the deal, management stated that Verizon Wireless was the largest and most profitable wireless carrier in the United States, and that growth would more than justify the acquisition. This has materialized over the first six months of the year, as Verizon's operating profit is up 16% versus the same period one year ago. Over time, the higher growth presented by the acquisition is likely to prove that the deal was worth doing.
This is supported by comments made by management. Verizon Chief Executive Officer Lowell McAdam stated at a recent investor conference that Verizon's wireless business is seeing very good results this year. In fact, retail postpaid customer additions are 40% higher quarter-to-date than in the same period one year ago. This gave management the confidence in the company's future cash flow generation, even though the acquisition saddled the company with a huge amount of debt.
The other reason management isn't overly concerned about providing higher dividend increases in the face of such large amounts of debt is that Verizon financed the deal effectively. To support the acquisition, Verizon conducted the largest bond offering ever at the time. The company sold $49 billion in bonds last year.
The reason why this was a great move is that it took advantage of the low interest rate environment to pursue low-cost financing. Verizon sold a mix of maturities. This included 10-year bonds that yielded 5.1%, which was actually comparable to the stock's dividend yield at the time. These interest rates won't last forever, and if Verizon wanted to secure the entire wireless unit, now was the time to do it.
Trust in Verizon's dividend
It's reasonable to question Verizon's dividend policy, considering the massive amount of debt the company took on to finance its acquisition of Verizon Wireless. These concerns are misguided, however, because the growth potential and attractive financing that Verizon secured make the deal very valuable for shareholders. Verizon generated $2.15 in diluted earnings per share over the first half of the year, up 47% year-over-year. At the same time, Verizon paid $1.06 per share in dividends over this period, meaning Verizon's earnings payout ratio stands at a very comfortable 49%.
Verizon distributed less than half of its earnings to shareholders, which explains why the company had enough confidence to raise its dividend in the face of swelling debt. That's why shareholders should be equally confident in the dividend, and look forward to getting more cash in their pockets next week.