Verizon Dividend – Slowing or Growing
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Many people know Verizon (NYSE: VZ) either through using one of their services, or by their nearly ubiquitous commercials. The company recently reported quarterly earnings, with revenue up 4.6% and EPS up 15%. Engadget.com was impressed by the company's performance saying that, “Big Red's performance is now as strong as ever.” While I agree it looks like an impressive quarter, what I'm most concerned about is Verizon's dividend. With a nearly 5% current yield, I would venture to say that many investors are buying Verizon for the yield.
For years, Verizon and AT&T (NYSE: T) have been two of the more favored investments in the market, because of their stability and their dividends. I've also argued before that contrary to popular belief, both carriers make a sizable amount of money on smartphones even if they are heavily subsidized. With Verizon showing about 108 million wireless subscribers, and AT&T showing about 103 million subscribers, you can see these two behemoths clearly dominate the wireless industry. AT&T pays the higher dividend yield at about 5.34% and has about the same growth profile. My reason for picking Verizon to study is, the company shows much better recent subscriber additions. In fact, “Over the last five quarters, Verizon has added nearly three times as many contract subscribers as AT&T.”
So what's been going on with Verizon's dividend? Take a look at the last 11 years:
You can see that over the last six years, Verizon has consistently raised its dividend. However, prior to that, the dividend was only raised twice in the prior five years. Since this most recent six year streak began, the average dividend increase has been 3.59%.
So Verizon has an established pattern of raising the dividend at least over the last six years. There are two questions that still need to be answered. First, can Verizon continue this streak of dividend increases? Second, are the dividend increases likely to speed up or slow down?
Verizon should be able to raise its dividend in the near future, however with a few caveats. Verizon has a strange problem that is only partially something they can control. The problem is, in the last 3 years plus 1 quarter, their gross profit margin has stayed relatively stable between 58.57% and 59.92%, while their free cash flow payout of the dividend has jumped substantially. However, look at what has happened to Verizon's free cash flow payout ratio:
You can see there is beginning to be a problem. While a free cash flow payout ratio of just over 50% is not problematic yet, the rate of increase is much too fast. In the last 3 years, Verizon's payout ratio has jumped 48.68%. This is far ahead of the company's earnings and cash flow generation, and is not sustainable. While this is not a challenge to the company's dividend yet, it will be if this trend continues.
The answer to the question of whether dividend increases will speed up or slow down, depends almost directly on the issue above. Verizon management will need to manage their cash flow generation and dividend payments together. In 2008 and 2009 as the company was increasing their dividend by 5-6% or more, the company's earnings were actually staying flat or contracting. Going forward, I would expect the company to grow its dividend based on earnings and cash flow growth. This could actually be good news for shareholders, as analysts expect earnings growth of nearly 11%. In fact, as the most recent quarter shows, the EPS growth of 15% actually generated about 18% growth in operating cash flow. If Verizon can just meet earnings estimates and generate this 11% growth, “Big Red” might be able to hand some “big green” back to its shareholders in better dividend growth.
MHenage owns shares of Verizon Communications. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.