Is Verizon’s dividend safe? Verizon generates $21.2 billion in net income and pays out a $10.8 billion dividend, so that payout ratio of 51.89% suggests the dividend is more than safe.
With that said, investors are understandably wondering if there is some gotcha under the hood because Verizon is paying out a massive 7.72% dividend currently.
Usually when dividends get this large, it’s worth scrutinizing the financials, especially the balance sheet, to identify whether something is awry. Generally, the culprit is that cash flows are insufficient to cover the dividend payout, but that’s simply not the case with Verizon.
Quite the contrary, the company has more than sufficient cash flows to pay shareholders and it doesn’t appear like that will change anytime soon either.
Analysts on Wall Street do have their concerns, thought. We identified 10 analysts that have revised their earnings estimates down, so it’s certainly not all sunshine and roses for Verizon’s profit and loss statement. With that said, they are more bullish than bearish and the consensus among 23 analysts is that Verizon fair value sits at $41.26 per share, a full 28% higher than current levels.
One way to measure the yield is to compare it with the 2 Year Treasury Rate that sits at 5.01% right now, a level high enough to attract investors to put money into ultra-safe government bonds. The reward to risk calculation is clear: grab an extra 2.7% on Verizon’s dividend yield with the risk the stock will fall, or pocket a guaranteed 5.01% on government bonds? Looking at Verizon’s share price, so far it seems investors are choosing the bonds.
Is VZ’s Business In Good Shape?
Although rising inflation rates could be seen as one reason investors are rotating out of equities in general, other factors have contributed to Verizon’s falling share price, which is down 16% so far in 2023.
Verizon’s crucial churn rate was starting to look bad. For instance, the firm improved its number sequentially in the second quarter from
0.83% in Q1 to
0.81% in Q2, but that pattern didn’t hold. The company’s churn spiked to 0.92% during Q3, representing a 24% increase from the 0.74% it recorded for the same quarter in 2021.
But why does this matter?
Churn rate is an important metric for companies that generate most of their revenue from paying customers. It’s a measure of how many customers leave or stop using a company’s products or services, and it can have a big impact on bottom-line profitability.
New acquisitions can help offset churn, but if the churn rate is high, it can be a sign that something is wrong with the product or service and that the company is losing quality customers.
That said, a churn rate of 0.92% is still very low – and the reason for the increase is almost certainly down to
VZ pushing up the price of its subscription plans. Furthermore, Q3 was the fifth straight quarter that Verizon Business saw its postpaid net phone additions increase upwards of 150,000.
Indeed, Verizon’s fundamental operations are looking pretty healthy, and, considering the size and scale of the business, it’s no surprise that the firm has a trailing twelve-month cash from operations of $36.6 billion. On top of that, VZ also has an admirably low price-to-cash flow ratio of 4.26, suggesting the company is undervalued, given its current showing.
How Safe Is Verizon’s Dividend?
On the face of it, VZ’s distribution certainly appears attractive. As mentioned earlier, the yield is exceptionally high at 7.72%, while the company has an 18-year streak of unbroken annual dividend increases. However, with a dividend as substantial as Verizon’s, some investors might be concerned that the business won’t be able to afford it long-term.
In fact, potential shareholders should be careful about buying high-yielding dividend stocks, especially when the payout ratio is steep, though it must be said not egregious.
The payout ratio, which is the percentage of earnings paid out as dividends, can give you a good idea of how sustainable a company’s dividend is. If the payout ratio is too high, the company is using most of its earnings to pay dividends and may not have enough left to reinvest in its business or pay other expenses. This can lead to a decline in the company’s cash flow and profits, making it unable to continue paying out high dividends.
VZ’s payout ratio of 51.89% is on the high side but doesn’t tip the barrel over to scary territory. Despite this, the business has robust gross revenues of $78 billion and a solid return on invested capital of 9.0%. Its return on equity is very impressive, currently sitting at 23.0%. All in all, the numbers look pretty good when examined through the lens of valuation.
Round-up: Is Verizon’s Dividend Sustainable?
Verizon’s dividend appears to be safe and sustainable thanks to massive cash flows and a reasonable payout ratio. Although analysts have revised earnings estimates downwards, the company has posted rising revenues over the past couple of years, reporting growth of 4.1% and 2.4% respectively in 2021 and 2022. For the past 4 years, operating income has eclipsed $30 billion, too, suggesting the company has ample room to keep paying its dividend for the foreseeable future.
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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.
