If Verizon’s juicy dividend yield of nearly 7% (blue line, upper chart) catches your eye, there are two questions you need to ask yourself. First, is that payout assured? And, second, what’s going to happen to the share price? Let’s tackle each.
First up, the payout: your starting point here is the firm's track record. The lower chart (blue bars) shows Verizon’s 20-year dividend payout history. Not only has the firm never cut its dividend, but it’s also managed to increase it for 16 consecutive years. Now, Verizon’s current dividend commitment is around $11 billion, which is $3 billion less than the free cash flow (FCF) the firm produced in 2022 – that’s cash left over for paying dividends (as well as other stuff like debt repayment, share buybacks, or acquisitions). In fact, Verizon’s only produced FCF lower than $11 billion twice since the financial crisis of 2008-09, and its revenue has climbed around 35% since then. What’s more, Verizon’s $23 billion capital spending sum last year was higher than usual due to 5G rollout costs, and the firm recently pointed out that this year's figure will be closer to $19 billion. That should boost 2023’s free cash flow and further swell the pot available for dividends.
So what about the stock price? Well, Verizon’s a mature player in this industry, and it’s unlikely to enjoy outsized growth from here. Its stock price has gone virtually nowhere over the past 20 years. And, sure, there’s always a risk that some new technology comes along and disrupts the way we communicate, but my guess is that smartphones will still be integral to our lives ten years from now. The telecom industry’s also highly regulated, and that means that while market share might ebb and flow between the big incumbents, a disruptive new entrant is pretty unlikely to come along.
Of course, there are risks – to both the dividend yield and the stock price. The firm's debt levels are quite high and some free cash could be earmarked for repayments. There will be new telecom standards to build out after 5G’s done too, and those might drain the firm's resources down the line. But when you weigh it all up, there’s probably a better-than-average chance that Verizon’s still operating one of (if not the) biggest mobile networks in the US in ten years. That might mean that the firm’s stock price is trading at least in line with today’s level (and possibly higher) and that its dividend yield could be an alternative to other payouts from assets like ten-year government bonds, for example.
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