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.
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 InvestorPlace.com. As of this writing, he was long VZ.