Market Commentary: Is This 7.9% Dividend Real?
In my view, Verizon’s generous dividend isn’t just stable, it’s on track to climb even higher. As it stands, Verizon offers a tantalizing dividend yield of 7.9%, a figure amplified by the recent dip in its stock price. The stock has lost about a fifth of its value from its peak over the past 52 weeks, an issue attributed to a host of investor worries.
Nonetheless, Wall Street is increasingly treating this downturn as a prime buying moment. They’re of the opinion that the anxieties plaguing the telecom giant are largely exaggerated. More importantly, they see room for Verizon to elevate its already substantial dividend distribution. They might be right, and here’s why.
Key Points
- Verizon’s stock has seen a decline, dropping nearly 20% from its 52-week high, which has subsequently increased its dividend yield to an appealing 7.9%.
- One of the key drivers of this positive outlook is Verizon’s robust free cash flow. The telecom company is projecting about $17 billion in free cash flow for this year and has a payout ratio of just over 50%.
- Coupled with its price hikes and cost reductions, Verizon is well-positioned to accelerate its deleveraging process and continue to grow its dividend.
Free Cash Flow Machine
One compelling factor bolstering this outlook is Verizon’s impressive free cash flow. The company is projecting around $17 billion in free cash flow this year, which when combined with the company’s 51% payout ratio means there’s ample room to keep dividend-seeking shareholders happy.
Strong and increasing free cash flow not only safeguards Verizon’s dividend but allows it to accumulate extra free cash for balance sheet improvement; management has made it clear that it aims to use its surplus cash for debt repayment, targeting a leverage ratio under 2 in the long run.
This additional financial wiggle room should allow the company to reallocate some extra free cash for share buybacks, as the leverage ratio falls. Moreover, a consistent debt paydown strategy will lead to lesser interest obligations, freeing up even more cash for balance sheet strengthening and shareholder returns.
More Good News
Verizon recently closed on a $10 billion funding agreement for its 5G initiative, saving over $1.7 billion each quarter in capital expenditures. Coupled with its recent price hikes, growth-focused investments, and overhead cuts, the company is poised to increase its cash flow further. All these elements combine to fast-track Verizon’s deleveraging and pave the way for more dividend growth.
Given these strong financial underpinnings, Verizon’s dividend is set to grow in the foreseeable future. So, if you’re on the hunt for a solid dividend play with upside potential, Verizon ought to be on your radar.
