The board of Verizon Communications Inc. (NYSE:VZ) has announced that it will be paying its dividend of $0.6525 on the 1st of November, an increased payment from last year's comparable dividend. The payment will take the dividend yield to 6.6%, which is in line with the average for the industry.
Verizon Communications' Earnings Easily Cover The Distributions
While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. Based on the last dividend, Verizon Communications is earning enough to cover the payment, but then it makes up 108% of cash flows. While the company may be more focused on returning cash to shareholders than growing the business at this time, we think that a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.
The next year is set to see EPS grow by 9.6%. If the dividend continues on this path, the payout ratio could be 48% by next year, which we think can be pretty sustainable going forward.
Verizon Communications Has A Solid Track Record
The company has a sustained record of paying dividends with very little fluctuation. Since 2012, the dividend has gone from $2.00 total annually to $2.61. This implies that the company grew its distributions at a yearly rate of about 2.7% over that duration. Although we can't deny that the dividend has been remarkably stable in the past, the growth has been pretty muted.
The Dividend's Growth Prospects Are Limited
The company's investors will be pleased to have been receiving dividend income for some time. However, Verizon Communications has only grown its earnings per share at 4.9% per annum over the past five years. Growth of 4.9% may indicate that the company has limited investment opportunity so it is returning its earnings to shareholders instead. This could mean the dividend doesn't have the growth potential we look for going into the future.
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. We don't think Verizon Communications is a great stock to add to your portfolio if income is your focus.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 2 warning signs for Verizon Communications that investors should know about before committing capital to this stock. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
What are the risks and opportunities for Verizon Communications?
Trading at 73.1% below our estimate of its fair value
Earnings are forecast to grow 4.27% per year
Has a high level of debt
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Verizon Communications Inc., through its subsidiaries, offers communications, technology, information, and entertainment products and services to consumers, businesses, and governmental entities worldwide.
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Undervalued established dividend payer.