HOW SAFE IS VERIZON’S DIVIDEND?

By Luis P. Lopez, Equity Analyst 

Verizon Communications Inc. (NYSE: VZ) is one of the few companies operating in the U.S telecommunications industry. The United States telecom market is roughly valued at around $583 billion in 2022, accounting for around one-third of the global telecom industry. 

Verizon Stock

Verizon stock is currently trading at around $53.40 per share, down around 6.30% over the previous 12 months. Currently, the stock is trading at 10 times its earnings per share, which is an attractive price given it has a healthy dividend yield. 

The company paid out $2.56 per share in annual dividends in 2021, which translates into a dividend yield of 4.8%. The free cash flow of $19.3 billion generated during 2021 was sufficient for a $10.5 billion dividend payout. Verizon has been raising its dividends consecutively for 15 years, which leads analysts to believe that the growth in dividends will continue in the future as well. 

Verizon spent around $18 billion in 2021 on maintaining and expanding its network. In 2021, it spent $52.9 billion on the C-band spectrum that will allow it to use the allotted frequencies in specified areas. The company’s investment in C-band spectrum and network infrastructure maintenance contributed to its loan burden of $151 billion. It should be noted that the company’s debt, while large on an absolute basis, is financed at very favorable terms with very low interest rates. The cost of the debt should pale in comparison to the revenue growth that could be unleashed by the debut of the 5G network. 

The mobile telecommunication company has partnered with various video streaming services, such as Walt Disney, Hulu, ESPN+, Sports leagues, and Apple Music services. According to analysts, the carrier’s partnerships with streaming companies are responsible for the higher sell-through of premium unlimited plans. 

4Q 2021 and FY-2021 highlights

Verizon reported full-year 2021 EPS of $5.32, compared with the EPS of $4.30 recorded in 2020. Operating revenues stood at $133.6 billion in 2021, an increase of 4.1% compared with 2020. The EPS for Q4 2021 turned out to be $1.11, flat from the same quarter last year. However, operating revenues were down marginally by 1.8% from Q4 2020 to $34.1 billion in Q4 2021.

In 2021, the company divested Verizon Media. Further, the telecom company added 558,000 postpaid phone subscribers or 30,000 subscribers less than the analysts’ estimates for 588,000 subscribers. 

Outlook

Verizon management expects that it would achieve organic service and other revenue growth of 3 percent in 2022. Further, the company forecasts that the wireless service revenue will grow in the range of 9% to 10% (3% excluding TracFone). The adjusted EBITDA is expected to grow at 2% to 3% while capital expenditures would be between  $21.5 billion to $23.5 billion in 2022.  For 2022, the company expects adjusted per-share earnings to be within the range of $5.40 to $5.55 per share. The revenue growth of the company is forecasted to be between 1% to 1.5%, including the sale of Verizon Media.

Can Verizon sustain its dividends?

Verizon’s revenues appear stable and dependable because smartphones have become ubiquitous, with around 85% of American households owning smartphones. Even during a recession, people continue to spend on their telecommunication needs and pay their phone bills. With such a wide reach, Verizon can take advantage of the opportunity and take steps to further grow its revenue. 

Even if Verizon’s revenues and profits dwindle significantly due to any worst-case scenario, its current dividend payout ratio of 47% is affordable. In other words, if only the company’s profit is reduced to half would the company be troubled to pay out dividends. This means that Verizon can afford drops in revenue or profitability without disturbing its dividend payouts. 

The 5G technology could open new avenues for Verizon

Although the company’s revenues, on average, have been growing at an annual compound rate of just 2 percent over the past decade, its investments in the 5G technology could pay dividends for many years to come. The 5G technology has numerous applications in various industries that would drive the demand for connectivity and potentially unlock new revenue opportunities for the company. With an extensive network, infrastructure, and growing investment in 5G technology, Verizon is aptly-positioned to benefit from the increased connectivity demand and opportunities arising from the technology. According to experts, autonomous driving, AI in industrial manufacturing, streaming services, and the Internet of Things are some of the industries that would require increased dependency on the 5G technology. 

Additionally, Verizon’s decision to sell it’s media business means that all cash and resources will be dedicated to growing the company’s core business: 21st century connectivity. As companies such as Disney and AT&T have found out, the content creation business has turned out to be very expensive. Moving forward, Verizon shareholders won’t have to worry about getting into trench warfare with deep pocketed content rivals. 

Conclusion

Long term investors should consider the impact of the potential opportunities created by the 5G technology on Verizon’s revenue and profitability. While Verizon is not a growth stock, it provides investors with an attractive dividend yield of 4.8%, generates consistent and healthy free cash flows, and has bright prospects for the future. The dividends also appear sustainable given the strong free cash flow reserves. At its current price level, the stock looks cheap as it is trading at just 10 times its trailing 12-month EPS. With all the positives and the possible tailwinds, the stock is a bargain at its current price level for value and dividend investors.