When you are considering a dividend stock, the first question you ask is whether the dividend is safe — whether it is covered by earnings.
In the case of Verizon Communications Inc. (NYSE:VZ) the answer is that it’s safe as houses. For a dividend investor with several holdings, this is a must-have.
Verizon and its predecessor companies, NYNEX and Bell Atlantic, have been paying regular dividends since 1987, just a few years after splitting up from the old AT&T Inc. (NYSE:T) as “Baby Bells” in 1984. Even during the worst of the market’s financial problems, such as the dot-com collapse and the financial collapse of 2008, Verizon kept paying shareholders.
Verizon’s most recent dividend, paid in October, was about 1% of its stock price that day. More important, net income of 89 cents per share more than covered the payout. Even when the company fails to cover the dividend with earnings, as in 2012, the money is delivered anyway.
VZ stock pays you first. If you need income from your stock investment you need Verizon.
Wireless Makes It Work
Verizon has over $244 billion in assets and over $30 billion in operating cash flow. It also has a solid future because of where its money is invested, and where the cash flow is coming from.
Don’t think of Verizon as a phone company. Its business is wireless internet services. Verizon got into mobile through a joint venture with Vodafone Group Plc (ADR) (NYSE:VOD), which it finally bought out in 2014, for $130 billion.
Wireless cash flow has compensated for the slide in the wired business. Cable turns out to have a much better technical structure for delivering fast internet service. Verizon has tried to improve its network under the name FiOS, but without much profit. Wireless is the way it has gone and will continue to go.
Along with Vodafone, Verizon invested capital in its wireless network throughout this century, maintaining a steady share of the U.S. market that ranges from 32% to 35%. Currently it’s at the high end of that range, and it can maintain pricing without sacrificing market share. Its average revenue per user, or ARPU, is over $50 per month.
Internet Ads Mean Vertical Integration
The deal with Vodafone left Verizon with less cash for acquisitions, and the centerpiece of its strategy is internet advertising. Verizon bought AOL in 2015 and followed that by purchasing the operating units of Yahoo! Inc. (NASDAQ:YHOO) this year, for a total spend of under $10 billion.
This gives it a host of small internet content plays, ranging from the Huffington Post to Yahoo Finance, but more importantly it gives Verizon a strong position in mobile video advertising, a growing market with strong pricing. Its position in mobile advertising also gives VZ stock a clear view of changing trends among users, which should drive future acquisitions.
Verizon’s commitment to its mobile-first strategy has also been shown in its other merger activity. This year Verizon sold its cloud data centers to Equinix Inc (NASDAQ:EQIX) and bought XO Communications for its very-high-end spectrum assets, which should allow it to move seamlessly into 5G mobile services as demand rises.
Should You Buy Verizon?
You don’t want to buy a dividend stock everyone loves if you want the best value for money. The higher the price you pay for the stock, the lower your dividend yield will be, now and in the future.
But with a yield of 4.5%, Verizon still looks attractive, despite a price gain of 10% in the last month.
Profit margins have been rising steadily over the last several years, and operating margins are up to 25%, so as it pays down debt from the Vodafone acquisition, keeping the debt-to-assets level below 50%, it should be even more attractive.
Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
