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Verizon Communications (NYSE:VZ) is one of the biggest local phone companies, serving approximately 25% of the U.S. population. The company owns a network that reaches cities around the world. Verizon Wireless serves about 94 million retail customers across the United States. Verizon spun off its directories unit in 2006 and its local phone operations in Maine, Vermont, and New Hampshire in 2008. Additional lines were spun off to Frontier Communications (NASDAQ:FTR) in 2010.

This communications giant is one of the stocks which offer attractive dividends. In order to assess the dividend stability, I have conducted a thorough cash flow and debt analysis on Verizon. For my analysis, I have used data from the company SEC filings and the analysis covers previous three years. Through my analysis, I have tried to spot the trend in the cash flows and some essential ratios of the company.

Dividend History:

Verizon Communications has an extremely impressive dividend history. The company has increased the dividends on a consistent basis since it started paying dividends. At the moment, the company pays a quarterly dividend of $0.515 and an impressive dividend yield of 4.40% based on the closing price of September 27, 2012. The wireless communication giant hiked its annual dividend by 3% to $2.06 per share. The new dividend will be paid on November 1, 2012, to shareholders of record as of October 10, 2012.

Free Cash Flows and Total Debt:

Free Cash Flows

2011

2010

2009

Net Income

$10,198

$10,217

$11,601

Depreciation and Amortization

$16,496

$16,405

$16,534

Funds from Operations (FFO)

$26,694

$26,622

$28,135

change in noncash current assets

$350

$3,845

$1,585

change in noncash current liabilities

$2,857

$2,759

$1,786

Operating Cash flows

$29,901

$33,226

$31,506

Capital Expenditures

$16,244

$16,458

$17,047

Free Operating Cash Flow

$13,657

$16,768

$14,459

Long Term Debt

$50,303

$45,252

$55,051

Source: SEC filings

Over the past three years, Verizon has demonstrated impressive cash flows. At the end of 2011, Verizon funds from operations stood at $26.69 billion. Verizon funds from operations showed a slight improvement from the previous year levels of $26.62 billion. However, the current FFO stood almost $1.5 lower than the levels of 2009. At the end of 2009, Verizon FFO stood at just over $28 billion. In the following two years, Verizon recorded a lower net income than the levels of 2009. However, the depreciation and amortization expense has remained fairly stable at around $16.5 billion.

In addition, this communication giant has massive cash flows from operations of $29.9 billion. Over the past three years, cash flows from operations have shown a fluctuating trend, and cash flows from operations remained around $30 billion. Although, current payout ratio based on earnings of the company is significantly high at around 200%. The total dividends paid by the company are well covered with the free cash flows. At the end of 2011, Verizon generated EPS of $1.01. While, the dividends paid by the company were $5.5 billion. However, Verizon had free cash flows of more than $13 billion indicating adequate dividend coverage.

Verizon makes massive capital expenditures, and in each of the past three years, the company has spent more than $16 billion. However, the capital expenditures have declined slightly during the past three years. Verizon has massive amounts of debt outstanding. The company paid off almost $10 billion of the total debt in 2010; however, debt levels again went up in 2011. Currently, Verizon debt stands at $50.3 billion.

Essential Ratios:

Essential Ratios

2011

2010

2009

Funds from Operations(FFO)/Total Debt

0.53

0.59

0.51

FFO/Capital spending requirements

1.64

1.62

1.65

Free Operating Cash Flow + interest expense/ Interest expense

5.83

7.65

5.66

Debt Service coverage

2.15

1.92

1.70

FFO to total debt is a conventional ratio used to measure the debt situation of the company. Verizon FFO is in an impressive position, and the ratio indicates that the firm has enough cash flows to cover its debt obligations. In addition, the ratio has been relatively stable during the past three years. There was an increase in the ratio due to the decrease in total debt in 2010. However, the ratio came back to normal of around 0.5 in 2011. Although, Verizon makes massive capital expenditures, FFO to capital expenditures ratio indicates the firm should be able to meet its capital spending requirements. Verizon does not make massive interest payments for such high levels of debt. As a result, the coverage ratios of Verizon are extremely impressive. Interest coverage ratio indicates the firm has adequate cash flows to cover the interest expense. Furthermore, debt service coverage ratio indicates the firm is comfortable in meeting its total debt service expenses.

Competition:

Verizon's major competitors are Sprint Nextel (NYSE:S), AT&T (NYSE:T), Deutsche Telekom and United States Cellular (NYSE:USM). VZ is growing due to its unique products. The firm has already recognized sales of 110,875 million for 2011 and 106,565 million for 2010, showing a growth rate of 4.43 percent during the last three years. In the last three years, Sprint recorded a growth rate of -1.86 percent, whereas United State Cellular and Deutsche Telekom grew at 0.78 percent and -1.66 percent, respectively. Additionally, AT&T's earnings suggest a growth rate of -20%. AT&T had a tough time due to the failure of T-Mobile takeover attempt.

Summary:

Verizon Communications is an extremely successful player in the communications industry. The firm has a strong foothold in the market. I believe the company will continue to grow at an impressive rate and the juicy dividends will continue. As a result of my analysis, I can say that the firm should not have any trouble meeting its dividend obligations in the near future. The strong cash flows leave substantial room for dividend growth. I am expecting another dividend increase in the next year.

Source: Verizon: Impressive Dividends Set To Continue