Monday, 6 May 2024

Is Verizon’s Dividend Still Safe?

by BD Banks

Verizon Communications (NYSE: VZ) is a stock that has been struggling amid rising interest rates. Over the past three years, it has declined by 30% in value. As a result of that sell-off, the stock’s dividend yield is up to 6.6%, which is far higher than normal for the business. Typically, the stock yields around 4%.

Are the stock’s struggles a sign that the company is in trouble, and that its yield is unsustainable? Or have the markets overreacted to the current economic conditions, and could Verizon simply be one of the best bargains out there for income investors?

Here’s what Verizon’s latest numbers say

Verizon released its latest quarterly numbers on April 22. For the first three months of 2024, the telecom company’s operating revenue was flat at $33 billion. Its consolidated net income of $4.7 billion was also lower than the $5 billion it reported a year earlier. The one encouraging number, however, was the free cash flow. At $2.7 billion for the quarter, it was higher than the $2.3 billion in free cash that Verizon generated in the prior-year period.

Nonetheless, CEO Hans Vestberg called the results “strong” and says that the company is on track to meet its guidance for the year. While some investors may debate that assessment of the performance, the company isn’t exactly expecting a blowout year in 2024; Verizon’s guidance calls for a 2% to 3.5% growth in wireless service revenue for the full year, and for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to rise between 1% and 3%.

Overall, it wasn’t a great quarter, but given the circumstances (i.e., people cutting back on spending due to inflation), it wasn’t a shocking result for Verizon, either.

What does this mean for the dividend?

Dividend investors will want to focus on the payout ratio. And last quarter, Verizon’s earnings per share totaled $1.09. That’s far higher than the $0.665 that the company pays in dividends each quarter. It means that it’s currently paying out about 61% of its profits back to shareholders in the form of dividend payments.

Another way to analyze the dividend is to look at cash flow. Free cash flow is what the business has available, after capital expenditures, to either reinvest back into its operations or to distribute to shareholders in the form of dividends. Last quarter, the company paid out $2.8 billion in cash dividends. That is slightly more than the $2.7 billion it reported in free cash flow. It’s not a huge gap, and cash flow can vary from quarter to quarter depending on the timing of bill payments and the collection of receivables, so it’s not necessarily a huge issue at this point.

Overall, there isn’t any big cause for concern with respect to Verizon’s dividend. The business is steady, and although the growth rate may be underwhelming, the company is still doing well amid the current economic conditions.

Should you buy Verizon stock?

Verizon offers investors a good yield and with the stock trading at less than 9 times its estimated future earnings, based on analyst expectations. In other words, there’s some good value here. Verizon’s also trading at just 1.8 times its book value, and even when factoring in its estimated future growth, its price-to-earnings-to-growth ratio of 1.1 also suggests it’s a very reasonably priced stock to own.

Once interest rates inevitably come down, Verizon’s stock could become a much more popular buy than it is today. I think given its low valuation and high dividend, this is an investment worth adding to your portfolio. There’s a good margin of safety here for risk-averse investors as well.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.