Verizon Communications (NYSE: VZ) inventory at the moment gives traders a beneficiant forward dividend yield of 6.6%, supported by the corporate’s unwavering dedication to return money to shareholders. In September 2023, Verizon boosted its dividend 2% to $0.665 per share, its seventeenth consecutive yr of dividend hikes.
Generally a excessive yield is masking underlying monetary difficulties. Since dividend yield and inventory value are inversely associated, a low value might replicate deteriorating monetary situations. Dividends additionally will not be assured to proceed. Declining earnings and/or elevated leverage might drive an organization to remove or scale back its dividend.
Given its excessive dividend yield, ought to traders be involved concerning the security of Verizon’s dividend?
Earnings stability gives adequate money move to cowl the dividend
Though Verizon’s broadband and wi-fi sectors are exhibiting promising long-term progress, its core enterprise is stagnant, leading to lackluster earnings progress. Uninspiring earnings per share (EPS) progress, nonetheless, doesn’t suggest the dividend is in jeopardy. Verizon’s telecom properties generate extremely predictable and secure earnings earlier than curiosity, taxes, depreciation, and amortization (EBITDA) and free money move.
The corporate’s income remained constant all through 2023 and the primary quarter of 2024, when the corporate narrowly missed consensus expectations. That is vital, as dividends and/or share buybacks are paid from an organization’s free money move.
Nonetheless, a assessment of Verizon’s first-quarter earnings report reveals that its skill to generate sturdy free money move is greater than adequate to cowl its dividend.
Verizon notched $7.1 billion in money move — a lower from $8.3 billion for a similar interval the prior yr. Nonetheless, its capital expenditures decreased by $1.6 billion, leading to a internet free-cash-flow place of $2.7 billion, a wholesome 17% enhance over the primary quarter of 2023 and sufficient to cowl its first-quarter dividend.
Verizon’s dividend value it $11 billion in 2023. The corporate earned $18.7 billion in free money move in 2023, a $4.6 billion enhance over 2022. Verizon paid out about 60% of its free money move in dividend distributions in 2023, offering a wholesome margin of security for traders on the lookout for a dependable stream of future earnings.
The corporate’s excessive debt degree is trigger for concern
The one blemish that detracts from the high-yield funding thesis is the corporate’s staggering $151.7 billion in complete debt. As a result of excessive curiosity prices, this degree of debt diminishes Verizon’s skill to maximise free money move.
The corporate’s debt-to-equity ratio is 1.86, decrease than 79% of the businesses within the telecommunications trade. Its curiosity protection ratio of 4.81 is satisfactory for debt service and ranks it higher than 52% of its friends.
Does Verizon’s extreme debt put the dividend in danger?
Verizon’s dividend isn’t in imminent peril. Since its payout ratio is round 60%, the corporate’s considerable surplus free money move may very well be used to pay down a portion of its long-term debt. This would cut back curiosity expense and bolster obtainable free money move.
Even with an inordinately excessive debt-to-equity ratio, Wall Avenue is assured in Verizon’s continued earnings stability. The corporate garnered ranking upgrades in January.
Is it a purchase?
Verizon’s wealthy yield is compelling. And if Verizon elects to use a few of its extra free money move to pay down a portion of the debt, the share value would reply favorably.
Verizon’s lofty 6.7% yield, backed by its skill to supply secure income, makes the inventory an appropriate addition to traders’ portfolios.
Do you have to make investments $1,000 in Verizon Communications proper now?
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John Kinsellagh has positions in Verizon Communications. The Motley Idiot recommends Verizon Communications. The Motley Idiot has a disclosure policy.
Is Verizon Stock a Buy for Income Investors? was initially printed by The Motley Idiot
