VERIZON COMMUNICATIONS INC: DIALING UP A HIGH DIVIDEND

By Jose P. Lopez 

Introduction….A Secure Connection? 

Verizon Communications stands as one of the highest dividend-paying stocks within the S&P 500, captivating the attention of income-focused investors. Considering its substantial dividend yield, the paramount question for these investors is the sustainability and safety of these payments. This article explores the factors that support the safety of Verizon’s dividends, evaluating whether the telecom giant can maintain its generous payout in an industry characterized by rapid technological advances and significant capital expenditure requirements.

Sustainability and Safety of Verizon’s Dividend:

Verizon has been a standout performer in providing substantial dividends, especially when compared to the broader market.

• Hefty Dividend Payments: Currently, Verizon boasts a dividend yield of 6.57%, which significantly surpasses the average yield found within the S&P 500, making it an attractive stock for income-focused investors. Even with today’s higher interest rates, Verizon’s dividend represents a significant premium over most long term bonds. Investors in Verizon would also be taxed less than most bondholders. 
• Current Dividend Metrics: Verizon’s declared a recent quarterly dividend of $0.67 per share, annualizing to $2.66, a figure that is fairly competitive within the technology sector and especially substantial for large telecom operators. The company has only grown the dividend at a rate of 1.89% per year over the last five years, which is actually lower than the rate of inflation. The company pays out almost 100% of its net income, but this number is deceiving. Companies like Verizon have a lot of physical assets, which create a lot of depreciation over time. This is mostly an accounting expense. So a better measurement of dividend stability is to compare dividend payments, and debt payments, to the free cash flow that the company generates. When we look at this, we see that Verizon only pays out about 60% of its free cash flow in the form of dividend. Most importantly, the company’s debt payments only equal about 38% of the company’s free cash flow. This is why Verizon is considered a high dividend company, but not a high dividend growth company.  After paying for all of the company’s ongoing capital investments and the basic expenses of the business, Verizon still generates enough free cash flow to maintain the dividend and service its debts. But barely. An investor could enjoy this high dividend for the foreseeable future, but shouldn’t expect much dividend growth. The company just isn’t generating enough cash to raise the dividend on a consistent basis the way that Microsoft or Eli Lilly does. Verizon is good for investors who want high income today, but aren’t worried too much about tomorrow. 

Framing the Sustainability of High Dividends:

Key financial metrics and operational strategies underscore the robustness of these dividends:

• Robust Cash Flows: For the fiscal year 2024, Verizon reported operating cash flows of $37.5 billion, a clear demonstration of strong cash generation capabilities that are critical for supporting its dividend distribution. As we mentioned before, $18.78 billion of this is free cash flow, which means that the company has no trouble servicing it’s basic operational needs. 
• Debt and Financial Health: With an interest coverage of 3.99, Verizon has managed its debt efficiently with a stable credit outlook, which helps reassure investors about the sustainability of dividends despite the significant capital requirements typical to the telecom industry. Remember, despite many billions in debt, the company’s annual debt payments amount to just $7.3 billion per year, against a free cash flow of $18.78 billion. Verizon has done an excellent job of locking in its debts for very long periods of time at very low interest rates. Some of its outstanding bonds don’t come due until the year 2060, and they pay just a fraction of today’s higher interest rates! 
• Operational Efficiency: Verizon’s investments in network improvements and technology upgrades have allowed it to manage operational costs effectively. These advancements are vital for preserving profit margins, thus supporting ongoing dividend payments.

Challenges and Risk Management:

Analyzing potential risks helps in understanding the layers of financial health and sustainability:

• Market Competition and CapEx: Verizon’s capital expenditures, crucial for upgrading and expanding technological capabilities such as 5G, are balanced against its revenue to ensure financial stability. In 2024, Verizon continued to allocate substantial funds towards these capital expenditures, amounting to $18.8 billion, maintaining a competitive edge in the market.
• Regulatory Changes: Regulations in the telecom sector can impact costs and profit margins. Verizon’s proactive regulatory affairs strategy aims to mitigate these potential impacts, fostering an environment conducive to stable dividend flows.

Assessing Future Prospects:

Future trends and Verizon’s strategic response also play essential roles:

• 5G Rollout and Technological Adoption: The ongoing rollout of 5G technology and related services presents significant growth opportunities for Verizon. This advancement is expected to boost the company’s service offerings and, consequently, its financial performance and dividend sustainability.
• Diversification of Services: With Verizon’s move into new areas such as content delivery and advertising technologies, these verticals provide conceivable new revenue streams. Over time, as these services gain scale, they can crucially contribute to supporting dividends. 

Conclusion

Verizon’s commitment to maintaining a high dividend yield, backed by strong cash flow, prudent debt management strategies, and continuous sector-specific investments, indicates a stable and promising path for dividend sustainability. The high dividend is very likely sustainable, but the wise investor should not expect it to grow too much. This comprehensive financial health and forward-looking strategies highlight the corporation’s capability to maintain its status as a high dividend-paying entity within the S&P 500 index. For investors seeking income through dividends (and the tax benefits these bring over bonds), Verizon presents a solid option, albeit one that necessitates continual evaluation in light of evolving industry dynamics and technological advancements.