Verizon Raises Dividends, But Is it Enough?

With the expectations for the long Labor Day weekend, few companies announced any dividend hikes. The major dividend increase came from Verizon Communications Inc. (VZ) which offers Wireline and Domestic Wireless communication service in the US. The company’s board of directors announced a 3.3% increase in its quarterly dividends to 47.5 cents/share. This is the third consecutive year that Verizon's Board of Directors has approved a quarterly dividend increase in September.

Verizon chairman and CEO said: "This increase reflects the strength of our cash flow and balance sheet. It demonstrates the Board's commitment to return cash to our shareholders while continuing to invest in the long-term growth of our business."

The company currently yields a very respectable 6.10%. Before you decide that Verizon is a great company to own however, please consider the following information.

First, the company has been unable to increase earnings per share over the past decade. EPS has declined from $2.66 in 1999 to $2.26 in 2008. Smart dividend growth investors understand that without growth in earnings, the company’s ability to generate dividend growth is very slim.

Second, the company does not have a long history of consecutive dividend increases. The company started raising its distributions in 2005, after 6 years of unchanged dividend payments. The positive factor however is that the company has not cut its dividends over the past 25 years. It has either raised them or kept them unchanged.

Third, the dividend payout ratio is not covered well enough to support further dividend increases. Currently this indicator is at 77%. This, coupled with the fact that EPS growth has been stagnant over the past decade not only means that future dividend growth would be close to zero, but that the dividend payment could end up in jeopardy of a dividend cut. The positive factor here is that in 2008 cash flow was $7.57 per share. The capital expenditures required to maintain the business run at about $6/share. This leaves all remaining cash flow for dividends.

The company’s growth could come from focusing on its wireless operations, realizing synergies from acquisitions of Alltel (AT) and cost efficiencies. I view as a positive the fact that Verizon is selling almost 5 million fixed lines and 1 million broadband customer accounts to Frontier for $8.6 billion. Wireline is in a decline, and thus focusing most of the attention to wireless operations is a smart move for the long run.

At this point of time I am not a big fan of telecom companies such as Verizon and AT&T (T), which both spot above average dividend yields. Their dividend payouts are above 74%, which seems unsustainable to me. Earnings growth also appears to have stalled, which is not a good sign for long term dividend growth.

On the other hand I like the fact that both companies have been gaining share of the wireless markets either through acquisitions or organic growth. The telecom market is highly competitive; the costs to maintain and operate a network run in the tens of billions of dollars for companies the size of AT&T and Verizon.

At this point of time I would maintain a hold on both AT&T and Verizon. While the current yield is very tempting, without a boost to dividends in the future, inflation would erode their purchasing power over time.

Disclosure: None

Comments

[grbn:]

"25 years without a dividend cut" is a substantial track record that VZ would be very reluctant to break, barring some sort of other problem or company meltdown. And, 6% yield is very respectable. I don't think inflation is an issue. I agree, hold, until the story changes.

Sep 08 12:00 PM

[Michael D.:]

VOD (Vodaphone PLC ADR). Get the big picture.

Sep 08 01:15 PM

[FIK:]

"25 years without a dividend cut" - The company has only been in existamce for 25 years. It was spun off of the old AT&T. It never had a dividend cut since it was spun off.

Sep 08 01:48 PM

[jaykal77:]

To raise the dividend as VZ has done in this financial environment is a vote of confidence in its business model. The piece fails to address the prospects for future earnings--the possibility of VZ picking up IPhone, the growing popularity of FIOS compared to cable companies, the wide appeal of its wireless network compared to its competitors, etc. JEK

Sep 08 04:08 PM

[notsosmart:]

just another bs article by another agenda author.learn to ignore or dont bother to finish reading.

Sep 08 08:16 PM

[tedster98:]

VZ and T both carry the lions share of the U.S. telco market. In effect, both are oligolpolies with little competition to speak of from the minors. Their growth has been from gobbling up smaller or weaker competitors. To say there has been no growth, does not take this into account. A dividend above 6% is very respectable in this hard market. The fact that VZ has not even reduced it, is a testament to its strength.

Sep 09 09:39 AM

[Dividend Gr...:]

NSS,

And what exactly is my agenda?


On Sep 08 08:16 PM notsosmart wrote:

> just another bs article by another agenda author.learn to ignore
> or dont bother to finish reading.

Sep 09 11:07 AM

[Dividend Gr...:]

Sure they are the leaders in the wireless markets. But then what investors fail to realize is that it is extremely easy to switch to a different provider, unlike regular fixed line service, where it was fairly difficult to do so. The telecom market is highly competitive, with huge need for capital costs. I have some experience in telecom, so I know what I am talking about ( or I think I know what I am talking about). That's why I am not willing to accept an extremely high dividend payout ratio, which would have been acceptable for a utility or an MLP.

It is important to look at the numbers and understand what is going on, rather than subject yourself to emotions, which were most likely inspired by the high current yields. EPS has been flat for a decade, or even worse - lower than what it were one decade ago.

Now if you really really need to generate current income, a small position in VZ or T could add to your overall diversification or income. And if you already own it, it's a good hold. But I doubt new investrors in VZ or T are adequately compensated for the risk they are taking..


On Sep 09 09:39 AM tedster98 wrote:

> VZ and T both carry the lions share of the U.S. telco market. In
> effect, both are oligolpolies with little competition to speak of
> from the minors. Their growth has been from gobbling up smaller or
> weaker competitors. To say there has been no growth, does not take
> this into account. A dividend above 6% is very respectable in this
> hard market. The fact that VZ has not even reduced it, is a testament
> to its strength.

Sep 09 11:14 AM

[William M. ...:]

Your analysis and follow up comments make good points. Certainly if your whole focus is to find the best of the best dividend stocks with least chance of a cut and most chance of a increase your point is a good one.

But it is also important to consider the current market environment. Billions of dollars are still in MMFs earning a measly 1/4 to 1/2% ! And VZ is relative to many other alternatives safe play. Even if the stock stays at $30-31 over the next year consider how much more $100,000 in VZ earning @6% =$6,000 vs. MMF $100,000 @ 1/2% = $500 ( with little upside possible based upon FED notes)

Sep 09 02:41 PM

[jstratt:]

I would add that VZ is growing its business long term which will support stronger future profits. As the author stated wireless market share is increasing. I would add that so is wireless usage, high speed internet and video.

VZ has invested heavily reducing current free cash flow but increasing longer term prospects. I think it is an excellent buy at 6%+ dividend and good forward prospects.

Sep 09 10:12 PM

[Pessimistic...:]

I got in last week to diversify a little better. I have had to visit the VZ store a few times last week and after chatting with their manager I am convinced they are going to do well for the near future even out a bit. There is no confirmation on the iphone's reported transition. Right now a bunch of chatter mostly from spculators, many here in the pages....according to my source. It is a wait and see.

The dividend spike is welcomed along with the thought of a small but meaningful lift back to 32. Make a little and then make a little extra.I am a longer term holder with an eye out. If the company gives you above 6%, hell yeah I'll take it. But I will stay vigilant on its progress. If things change, get out, hopefully with a dividend payout.

Sep 10 10:19 AM

[Kansas City...:]

The comparison and competition for yield between T and VZ comes down to the fact that VZ is mostly funding their via debt. look ath interest coverage and leverage ratio's of the two.

Sep 10 01:59 PM