Verizon Communications Inc. (VZ): A High-Yield Telecom For Current Income

I like the fact that Verizon was able to acquire the remaining 45% of Verizon Wireless it didn’t already own from Vodafone Group Plc (ADR) (NASDAQ:VOD) by paying $130 billion in cash and stock in 2013. The company took on approximately $60 billion in debt, and also offered asset stakes to Vodafone to pay up for Verizon Wireless. This deal was expected to be accretive to Verizon over time, and is helpful to have been done at a time when interest rates are so low. I own shares of Verizon, as part of this transaction where Vodafone shareholders received cash and Verizon stock as part of the deal.

It would be nice if the company takes on the challenge of repurchasing those dilutive shares over the next decade. However, it would also be important to pay off debt, in order to secure a more stable financial position for the uncertain future.

The annual dividend payment has increased by 3.30% per year over the past decade, which is lower than the growth in EPS. My expectations for future dividend growth are for them to be close to the rate of inflation over the next two decades.

A 3% growth in distributions translates into the dividend payment doubling every twenty four years on average. If we check the dividend history, going as far back as 1991, we could see that Verizon has last managed to double dividends every 25 years on average.

In the past decade, the dividend payout ratio has been all over the place. This was of course caused by the effect of one-time items on earnings per share. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently, Verizon Communications Inc. (NYSE:VZ) is attractively valued at 12.80 times forward earnings, and has a dividend yield of 4.40%. In comparison, rival AT&T is selling for 13.50 times forward earnings and yields 5%. These are proverbial high yield but slow growth dividend companies, that would be a good addition in a dividend growth portfolio. Check my article on the three types of dividend stocks for a diversified portfolio.

Both Verizon and AT&T have been preferred investment vehicles to retired investors, due to their above average yields. Unfortunately, the slow dividend growth can only be expected to keep pace with inflation at best. That being said, if one needs high current income today, and would not be opposed to mostly keeping up the purchasing power of their dividend income over the next decade or two, Verizon could be the type of company to buy and hold.

Full Disclosure: Long VZ and VOD