Verizon Communications Inc. (NYSE:VZ) will increase its dividend on the 1st of November to US$0.64. This takes the annual payment to 4.6% of the current stock price, which unfortunately is below what the industry is paying.
Verizon Communications' Dividend Is Well Covered By Earnings
If it is predictable over a long period, even low dividend yields can be attractive. Based on the last payment, Verizon Communications' earnings were much higher than the dividend, but it wasn't converting those earnings into cash flow. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.
Looking forward, earnings per share is forecast to rise by 9.3% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 49%, which is in the range that makes us comfortable with the sustainability of the dividend.
Verizon Communications Has A Solid Track Record
The company has a sustained record of paying dividends with very little fluctuation. The dividend has gone from US$1.95 in 2011 to the most recent annual payment of US$2.56. This means that it has been growing its distributions at 2.8% per annum over that time. Slow and steady dividend growth might not sound that exciting, but dividends have been stable for ten years, which we think makes this a fairly attractive offer.
The Dividend Has Growth Potential
Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Verizon Communications has impressed us by growing EPS at 6.4% per year over the past five years. While on an earnings basis, this company looks appealing as an income stock, the cash payout ratio still makes us cautious.
In summary, while it's always good to see the dividend being raised, we don't think Verizon Communications' payments are rock solid. While Verizon Communications is earning enough to cover the payments, the cash flows are lacking. We would be a touch cautious of relying on this stock primarily for the dividend income.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. For example, we've identified 3 warning signs for Verizon Communications (1 makes us a bit uncomfortable!) that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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