Verizon (NYSE: VZ) pays out a monster dividend. The telecom giant yields 6.7%, several times higher than the S&P500s 1.4% dividend yield.
One on one side high dividend yield is often a warning sign that the payout is at greater risk of being reduced if market conditions deteriorate. However, that couldn't be further from the truth Verizons healthy and safe dividend. That's one of the many reasons I continue to buy shares of the big dividend stock.
The numbers continue to rise better
Verizon issued Past invested several years in its network, including expanding its faster network 5G possibilities. That heavy investment phase is now in the rearview mirror, allowing the company to generate more free cash flow. For example, it generated $2.7 billion in free cash flow in the first quarter, an improvement of $400 million year over year, despite generating less cash flow from operations.
While free cash flow in the quarter didn't cover Verizon's $2.8 billion dividend payout, that's not a problem as it's a seasonally low period for the telecom giant. Verizon expects free cash flow to increase throughout the year, as it will in 2023. Last year, the company produced $18.7 billion in free cash flow, easily covering its $11 billion dividend expense.
Verizon's strong and growing free cash flow “supports both our dividend and a stronger balance sheet,” CEO Hans Vestberg said during the company's recent first-quarter earnings conference call. “This gives us more flexibility to accelerate debt reduction around the world second half of the yearwhich brings us closer to our long-term goal.”
The company ended the first quarter with a leverage ratio of 2.6, an improvement compared to the 2.7 in the same period last year. That does it a step closer to the long-term target of 1.75 to 2, which it aims to achieve next year. The company's solid and improving leverage ratio supports the company's A-rated creditworthiness.
The 'dividend is healthy and Certainly“
Verizon's improving free cash flow and strengthening balance sheet mean one thing. “Our dividend is healthy and safe,“ the CEO said during the first quarter call. Meanwhile, with its free cash flow dividend payout ratio Also continues to improveVerizon's payout is steadily getting stronger.
That will continue to position the company to increase its dividend, which it has done for 17 consecutive years as an industry leader. While the company's dividend growth has been modest in recent years, reaching less than 2% at the end of 2023, it is still rising. That's better than rival AT&Twhich cut its dividend a few years ago and hasn't increased it since.
A new catalyst could arrive soon to appear
While Verizon's improving financial profile and growing dividend are two of The biggest reasons I keep buying stocks aren't the only ones. The company is trading at an extremely cheap valuation. Less than nine times as much forward price-to-earnings ratioVerizon is trading at a discount of more than 50% on the S&P500 and it's almost 21 times the price-to-earnings ratio, and the Nasdaq-100 with an expected price-earnings ratio of more than 26. That low valuation is the reason why Verizon has such a high dividend yield.
Verizon could soon be in a position to take advantage of this disconnect by buying back its dirt-cheap shares. The company wants to bring leverage closer to its target range before resuming share buybacks. That could happen next year. Share buybacks would help boost earnings per share and its valuation.
A safe dividend with an upward catalyst
Verizon currently offers a great dividend yield, mainly due to its low valuation. That payout is healthy and safe thanks to the company's improving free cash flow and leverage ratio. These improvements could soon put the country in a position to buy back some of its dirt-cheap shares. That combination of a sustainable income stream with an upward catalyst is driving me to buy shares hand over fist while they remain cheap.
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Matt DiLallo holds positions at Verizon Communications. The Motley Fool recommends Verizon Communications. The Motley Fool has one disclosure policy.
Why I Continue Buying Shares of This Healthy and Safe Dividend Stock with a 6.7% Yield was originally published by The Motley Fool
