The telecom giant appears to be in a strong position to extend its streak of 18 consecutive dividend increases.
Many investors didn’t like Verizon Communications‘ (VZ -1.15%) third-quarter update on Tuesday. That’s obvious from Verizon stock sinking around 5% after the telecommunications giant reported its Q3 results.
But some investors should be pleased with Verizon’s latest update. Why? The company just gave good news to income investors who love its ultra-high dividend yield of nearly 6.5%.
The numbers that matter to income investors
Verizon announced Q3 revenue of $33.3 billion, flat year over year and slightly under the consensus estimate of $33.5 billion. It posted adjusted earnings per share of $1.19. Although this result was down from adjusted earnings per share of $1.22 in the prior-year period, it narrowly topped the average analysts’ estimate of $1.18 per share.
Wall Street analysts also focused on other figures in Verizon’s Q3 update. For example, the company reported total fixed wireless net additions of 363,000, bringing its subscriber base to nearly 4.2 million. This growth enabled Verizon to reach its fixed wireless subscriber target of 4 million to 5 million, 15 months ahead of schedule.
However, those aren’t the numbers that matter to income investors. Instead, they are more concerned with the financial metrics that make a difference in Verizon’s dividends continuing to flow and grow. And Verizon provided reasons to be confident about its dividend program in its Q3 update.
CEO Hans Erik Vestberg said in the Q3 earnings call that Verizon delivered the highest earnings before interest, taxes, depreciation, and amortization (EBITDA) in the company’s history. CFO Tony Skiadas noted that Verizon is on track to reach or exceed the midpoint of its guidance range for full-year adjusted EBITDA.
Skiadas added, “That strong EBITDA led to free cash flow of $14.5 billion year to date, and that’s consistent with the prior year.” He pointed out that the year-to-date free cash flow included an additional $2.5 billion in cash taxes.
Commitment from the top
Verizon’s leaders also expressed a strong commitment to the dividend program in the Q3 earnings call. Skiadas reiterated that the company’s top two capital allocation priorities are investing in the business and funding the quarterly dividend.
In September, Verizon announced it was increased the dividend for the 18th consecutive year. Skiadas said, “[O]ur goal is to put the board in a position for further dividend increases.”
How is the telecommunications company delivering on this goal? Vestberg highlighted the pending acquisition of Frontier Communications, which he said would expand Verizon’s total addressable market. He also maintained that Verizon’s broadband, mobility, and other services should enable the company to grow its EBITDA and cash flow.
Vestberg summarized his view, saying, “So all in all, we feel very positive where we are right now. We feel positive where the market is and our products.”
One potential fly in the ointment
I think income investors should also feel positive about Verizon’s dividend. However, there is one potential fly in the ointment.
Bank of America analyst David Barden pointed out in the Q3 earnings call that Verizon’s cash tax and capital expenditures are increasing. He expressed concern that the company’s working capital could increase if iPhone upgrades take off. Barden also noted that Frontier isn’t generating positive free cash flow. He asked Vestberg if this year could be “the high-water mark for free cash flow at Verizon.”
Vestberg didn’t seem to agree with Barden’s assumptions, though. He replied that Verizon has plenty of tailwinds to boost its cash flow. Skiadas added that the company remains focused on EBITDA growth, and that interest rates (which are now declining) will have an impact.
Income investors will need to stay tuned to see if anything changes about Verizon’s ability to fund its dividend. However, based on its Q3 update, the company appears to be in a strong position to continue paying the dividend at current levels and extend its streak of dividend increases next year.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Keith Speights has positions in Bank of America and Verizon Communications. The Motley Fool has positions in and recommends Bank of America. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
