Source: PaxForex Premium Analytics Portal, Fundamental Insight
Verizon Communications presently boasts an enticing dividend yield of approximately 6.6%, a feature that tends to attract investors seeking robust income streams. However, the allure of a high dividend yield often prompts caution, as it may signal underlying risks, with investors anticipating a potential cut to the dividend payout.
Recent instances of prominent companies, including Verizon's counterpart AT&T and Walgreens Boots Alliance, have experienced dividend reductions. AT&T, for instance, slashed its payout nearly in half in 2022, while Walgreens Boots Alliance reduced its dividend by almost 50%, marking the end of 47 years of consecutive dividend growth. The yields for these stocks stood at over 8.5% and 7.5%, respectively, before the dividend adjustments.
Verizon, on the other hand, currently maintains a quarterly dividend of $0.665 per share, translating to an annual payout of $2.66. With an anticipated fiscal 2024 adjusted earnings per share (EPS) in the range of $4.50 to $4.70, the company's payout ratio hovers around 58%. The use of adjusted EPS is pertinent, as it provides a clearer picture of the business's genuine earnings power by excluding one-time events like restructuring charges and legal settlements.
This modest payout ratio positions Verizon favorably, affording ample flexibility in the face of unforeseen challenges. Furthermore, the reasonable payout ratio indicates the potential for the telecom giant to explore dividend increases in the future.
Phone and internet services are crucial for both individuals and businesses, and they are generally considered indispensable, irrespective of economic conditions. Moreover, the associated costs are relatively low compared to other consumer and business expenses.
Despite the essential nature of these services, Verizon is not completely immune to the broader impact of an economic downturn. Some individuals may choose to downgrade their service, and businesses may face closures, presenting potential challenges. In the 2020 recession triggered by the COVID-19 pandemic, Verizon reported a modest decline in revenue, with sales dropping by 2.7% compared to the previous year.
However, Verizon's susceptibility to economic fluctuations is relatively low, reducing the likelihood of a dividend cut in response to sudden economic weakness. The US wireless phone market, where Verizon holds a dominant position with a 29% market share, operates as an oligopoly led by Verizon, AT&T, and T-Mobile, holding 47% and 24% market shares, respectively.
Verizon has historically positioned itself as a premium carrier focusing on a top-tier network, while T-Mobile has gained market share through competitive pricing. AT&T falls in the middle, balancing device promotions with profitability challenges.
Although Verizon has faced a decline in market share due to narrowing network quality differences, recent aggressive promotions have yielded positive results. In Q4 2023, the company reported 318,000 postpaid phone subscriber net additions, a reversal from the previous three quarters of losses.
Verizon's broadband business, like its wireless counterpart, competes with select cable players in each market. Limited competition and high barriers to entry, stemming from significant capital expenditure and network requirements, work to Verizon's advantage, minimizing the risk of new competitive threats.
A potential risk to Verizon's dividend lies in its relatively high leverage levels, with a net leverage ratio of 2.6 as of Q4 2023. While the staggered debt maturities mitigate repayment concerns, a prolonged period of elevated interest rates could lead to higher interest costs, impacting net income and free cash flow available for dividends.
Despite this risk, the average rate on Verizon's debt is currently 4.9%, well below short-term US government debt rates. While a 20%-30% increase in interest expenses could substantially reduce net income, the staggered debt maturities contribute to manageable risk.
Overall, we can consider Verizon's dividend as relatively safe, supported by a low payout ratio, the limited cyclicality of its business, and the oligopolistic structure of the US telecom industry. However, investors should remain vigilant about interest rates, as a prolonged period of much higher rates could significantly impact Verizon's interest expenses and, consequently, the available cash for dividends.
As long as the price is above 37.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 39.82
- Take Profit 1: 42.00
- Take Profit 2: 45.00
Alternative scenario:
If the level of 37.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 39.00
- Take Profit 1: 37.00
- Take Profit 2: 35.00
