Two years ago, I analyzed Verizon‘s (NYSE: VZ) dividend safety and rated it an “A.” It was very safe.
But can we say the same today? Let’s have a look.
The most important metric that we look at here at Safety Net headquarters is free cash flow. While Verizon has lots of it, it has been generating less and less over the past few years.
This year, free cash flow is expected to rise to $16.9 billion from last year’s $14 billion, which was the lowest since 2017. But you can see that since 2020, the trend has been lower.
The Safety Net model penalizes companies for declining cash flow. It’s a troubling sign.
Another important metric that we scrutinize is the payout ratio. This is the percentage of free cash flow that is paid out in dividends.
I want to see the payout ratio be 75% or lower. In other words, I am not comfortable with companies paying out more than 75% of their free cash flow to shareholders. That’s because if cash flow slips, like we’re seeing with Verizon, it makes it tougher to afford the dividend.
Last year, Verizon’s payout ratio was 77% – just above my 75% threshold. This year, because free cash flow is forecast to rise, the payout ratio is projected to be 66%, which is back within my comfort zone.
Verizon has raised its dividend every year for the past 16 years. Management stated as recently as last week that dividend growth is its objective and it expects to increase the payout again this year.
The company’s yield is impressive at 6.7%, and if management does what it says, the yield will be even higher (based on today’s price).
So we have a company with an excellent track record, and if free cash flow comes in close to where Wall Street expects, it should make the dividend very affordable and safe.
But until it does, we have to go with the numbers that have actually been reported, not what’s expected. And the numbers from the past few years aren’t stellar, which means the dividend is no longer as rock-solid as it was two years ago.
I won’t be surprised if next year at this time, Verizon’s dividend safety rating has been upgraded. But until the 2023 numbers come in, the dividend isn’t as safe as it once was.
Dividend Safety Rating: C
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