Don’t Sweat Verizon’s Big Debt Raise

by Marc Bastow | September 16, 2013 10:55 am

Earlier this month, telecom giant Verizon (VZ[1]) announced an agreement to buy British mobile operator Vodafone’s (VOD[2]) 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[3], with investors driving up prices (and conversely lowering yields).

You can argue about the “winners and losers”[4] 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[5] 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[6], 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.

Endnotes:
  1. VZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=VZ
  2. VOD: http://studio-5.financialcontent.com/investplace/quote?Symbol=VOD
  3. was a huge hit: http://www.bloomberg.com/news/2013-09-12/verizon-produces-2-09-billion-windfall-for-buyers-in-bond-sale.html
  4. argue about the “winners and losers”: http://investorplace.com/2013/09/vodafone-the-victor-in-verizon-wireless-buyout/
  5. dividend distribution: http://newscenter.verizon.com/corporate/news-articles/2013/05-13-vzw-dividend/
  6. paltry dividend grower: http://investorplace.com/2013/08/3-widely-held-dividend-stocks-vz-bmo-pfe/2/

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