Don’t Sweat Verizon’s Big Debt Raise

A big debt offering won't hamper Verizon's dividend payouts

Don’t Sweat Verizon’s Big Debt Raise

Earlier this month, telecom giant Verizon (VZ) announced an agreement to buy British mobile operator Vodafone’s (VOD) 45% interest in their partnership, Verizon Wireless.

The buyout price for the stake was $130 billion, including around $60 billion in cash. Where to get the money? A record-breaking $49 billion five-part offering of VZ bonds, covering tranches up 30 years. The offering, closed on Sept. 12, was a huge hit, with investors driving up prices (and conversely lowering yields).

You can argue about the “winners and losers” in this deal, but amid a big deal that just piled on a huge amount of debt onto VZ’s balance sheet, many of us holding VZ in retirement portfolios are wondering, “Is my dividend in danger?”

The answer: Probably not.

The interest costs for Verizon from the debt will come in at just more than $2.4 billion annually, based on the tranches, which range from three-year to 30-year terms.

So why shouldn’t income investors get worked up? Because VZ’s 45% stake in Verizon Wireless is worth billions more.

The Wall Street Journal reported for fiscal 2012, Verizon booked net income of $10.6 billion, but $9.7 billion of that went to Vodafone, while VZ booked a bottom line of $875 million. That’s all going to Verizon now.

More recently, in June, Verizon had to forgo $3.15 billion in the form of a partnership interest dividend distribution to Vodafone — that alone would appear to be enough to cover the financing charges from the bond offering.

Bottom Line

Verizon wasn’t going to do anything that jeopardized its status as a high-yielding dividend stock. Granted, I’ve made the point that Verizon is a pretty paltry dividend grower, but few people can find fault with a rock-solid yield north of 4% funded by a member of a virtual duopoly.

I know I don’t plan on selling my shares anytime soon.

Marc Bastow is an Assistant Editor at As of this writing, he was long VZ.

Article printed from InvestorPlace Media,

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