Is Verizon’s Dividend Still Safe?

Verizon Communications (VZ -0.10%) This is a stock that is struggling amid rising interest rates. Its value has fallen by 30% over the past three years. As a result of this selling, the stock’s dividend yield is up to 6.6%, which is much higher than usual for the company. Typically, stocks return around 4%.

Is a stock’s performance a sign that the company is in trouble and its returns are unsustainable? Or is the market overreacting to current economic conditions? Could Verizon be one of the best deals for income investors?

According to the latest numbers from Verizon:

Verizon released its latest quarterly numbers on April 22nd. In the first three months of 2024, telecommunications companies’ operating revenue was flat at $33 billion. Consolidated net income was $4.7 billion, compared to $5 billion reported the previous year. But the encouraging number was free cash flow. The $2.7 billion in free cash for the quarter was higher than the $2.3 billion in free cash Verizon generated in the year-ago period.

Nonetheless, CEO Hans Vestberg called the results “strong” and said the company was on track to meet this year’s guidance. While some investors may quibble with its performance ratings, the company isn’t predicting a blowout year in 2024. Verizon’s guidance calls for wireless service revenue to grow between 2% and 3.5% for the full year, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to grow between 1% and 3%.

It wasn’t a good quarter overall, but considering the circumstances (i.e. people cutting back on spending due to inflation), it wasn’t a shocking result for Verizon either.

What does this mean for dividends?

Dividend investors will want to focus on the payout ratio. And last quarter, Verizon’s earnings per share totaled $1.09. This is significantly higher than the $0.665 the company pays in dividends each quarter. This means that approximately 61% of current profits are being returned to shareholders in the form of dividends.

Another way to analyze dividends is to look at cash flow. Free cash flow is what a company can reinvest back into its operations after capital expenditures or distribute to shareholders in the form of dividends. Last quarter, the company paid out $2.8 billion in cash dividends. This is slightly higher than the $2.7 billion reported in free cash flow. It’s not a huge gap, and cash flow can vary from quarter to quarter depending on when bills are paid and when receivables are collected, so it’s not necessarily a big deal at this point.

Overall, there isn’t any major cause for concern regarding Verizon’s dividend. Business is steady, and although growth rates may be modest, the company is still performing well even in the current economic climate.

Should you buy Verizon stock?

Verizon offers investors good yields, with the stock trading at less than 9 times projected future earnings based on analyst expectations. That said, there is good value here. Verizon is also trading at just 1.8 times book value, and even taking into account expected future growth rates, its price-to-earnings-growth ratio of 1.1 suggests it’s a very reasonably priced stock.

When interest rates inevitably drop, Verizon’s stock could become an even more popular buy than it currently is. Considering the low valuation and high dividend, we think this is an investment worth adding to your portfolio. Even risk-averse investors have a margin of safety.