Verizon's 6.5%-Yielding Dividend Continues to Grow Stronger

Verizon (NYSE: VZ) pays a massive dividend. With a 6.5% dividend yield, the telecom giant has one of the 10 highest yields in the S&P 500. While a high dividend yield is often a red flag, that's not the case for Verizon.

Quite the contrary, as its big-time dividend is growing increasingly more sustainable. That was evident in its third-quarter earnings report on Tuesday.

Improvements where it matters most

When Verizon reported its third-quarter earnings, it disappointed some investors. Its revenue was flat year-over-year at $33.3 billion, which was below analysts' consensus estimate of $33.4 billion. Meanwhile, the company's net income declined from $4.9 billion, or $1.14 per share, in the third quarter of last year to $3.4 billion, or $0.78 per share.

However, the company's underlying profitability improved. Its adjusted earnings per share were $1.19, ahead of analysts' expectations of $1.18. Meanwhile, Verizon's adjusted EBITDA rose from $12.3 billion to $12.5 billion.

The company also posted growth in wireless services revenue (2.7% to $19.8 billion) and continued to expand its broadband business. It ended the period with nearly 4.2 million fixed wireless subscribers, reaching its goal 15 months ahead of schedule.

A stronger foundation under the dividend

Verizon also continued to produce a lot of cash. Its cash flow from operations totaled $26.5 billion through the first nine months of this year. That covered the company's capital spending ($12 billion) and dividend outlay ($8.4 billion) with room to spare ($6.1 billion). It used its excess free cash flow to continue strengthening its balance sheet by paying down debt.

The company ended the third quarter with its leverage ratio down to 2.5, an improvement from 2.6x in the year-ago period. While that's below the company's long-term target of 1.75x-2.0x that it initially hoped to achieve next year, it supports a solid investment grade rating of A-/BBB+/Baa1 from the three major credit rating agencies.

Verizon's leverage ratio should continue to fall in the coming quarters as it generates excess free cash flow. Credit rating agency Fitch sees Verizon's leverage ratio steadily falling toward around 2.3x by the end of next year. That expected additional improvement gave the company the confidence to use its strong balance sheet to acquire Frontier Communications in a proposed $20 billion all-cash deal. The additional debt will cause the company's leverage ratio to rise following the deal's closing, which Verizon expects will take 18 months. However, debt should come back down within two years of completing the deal as Verizon uses its growing excess free cash to repay those borrowings.

Fitch believes the combined company will produce $18 billion to $19 billion of pre-dividend free cash flow annually for the next several years, driven in part by the expectation that it will capture at least $500 million of cost savings. With its dividend costing about $11.2 billion annually, Verizon will produce a lot of excess free cash to repay debt.

Verizon's strong free cash flow and balance sheet should enable the company to continue increasing its dividend even as it repays debt following the Frontier deal. The company recently delivered its 18th consecutive annual dividend increase, the longest current streak in the U.S. telecom sector. While dividend growth will likely remain modest in the coming years (it has averaged around 2% annually), it could reaccelerate once the company finally achieves its long-term leverage target.

Verizon's big dividend is growing safer

Verizon offers income investors one of the highest dividend yields among S&P 500 members. As its third-quarter results show, the company's big-time dividend is on an increasingly sustainable foundation. The telecom giant's solid and improving financial metrics are giving it the confidence to use its balance sheet to acquire Frontier, which should ultimately grow its free cash flow and further enhance its ability to pay dividends. Because of that, Verizon remains an excellent option for those seeking a lucrative and steadily rising stream of dividend income.

Don’t miss this second chance at a potentially lucrative opportunity

Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.

On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:

• Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $21,294!*
• Apple: if you invested $1,000 when we doubled down in 2008, you’d have $44,736!*
• Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $416,371!*

Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of October 21, 2024

Matt DiLallo has positions in Verizon Communications. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.