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Verizon Ups Dividend, Concerns Remain
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ShareVerizon Communications (VZ - Analyst Report), the second largest U.S. phone company, raised its quarterly dividend by 2.6% to 48.75 cents per share. However, this is the smallest increase in four years due to slowing sales growth.
The dividend equates to $1.95 per share on an annualized basis, up from the $1.90 per share paid in August. Verizon will pay the increased dividend on November 1 to shareholders of record as of October 8.
Verizon remains committed to offer incremental returns to its shareholders via dividends and by leveraging a healthy free cash flow. Higher dividend indicates the strength of Verizon’s abundant free cash flow and rich balance sheet. The company distributed $5.3 billion and $2.7 billion as dividends to its shareholders in 2009 and in the first half of 2010, respectively. All dividends are covered by free cash flow and are considered to be safe.
At the end of June 2010, Verizon’s cash and cash equivalents increased to $4.8 billion from $0.8 billion in the year-ago period. Debt-to-equity ratio declined to 59.4% in the second quarter compared with 60.3% in the year-ago quarter. Free cash flow increased 76.7% year over year to $5.5 billion.
Currently, Verizon’s yield of 6.28% is higher than its largest competitor AT&T’s (T - Analyst Report) yield of 6.14%. Verizon’s dividend is also greater than its rival Qwest Communication’s (Q).
Verizon’s ability to pay a dividend depends on its revenue and earnings performance. The Zacks Consensus Estimate for the third quarter 2010 is earnings of 54 cents per share, representing a substantial 10.48% decline on an annualized basis. For 2010, the Zacks Consensus Estimate is $2.21, down 7.88% year over year.
We believe persistent erosion in access lines continues to hurt wireline revenues and margins as Verizon faces intense competition from cable companies and other alternative services providers. Further, high promotional and restructuring expenses may drag earnings and margins going forward. Although Verizon continues to expand its 3G wireless and wireline FiOS network footprint, returns from investments in these businesses are highly uncertain. The fourth generation (4G) infrastructure may be an obstacle if other service providers shift to different generation technologies.
We remain concerned about persistent access line losses, recent slowdown in post-paid subscriber growth as well as the company’s costly promotional war with AT&T, which may drag near-term earnings. Hence, we are currently maintaining our long-term Underperform recommendation with a short-term Zacks #3 (Hold) Rank for Verizon.
Read the full analyst report on VZ
Read the full analyst report on T
Read the full analyst report on Q
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