In the realm of dividend-paying giants, one stalwart stands tall: Verizon Communications. With a yield exceeding 6%, it reigns supreme as the highest-yielding member of the Dow Jones Industrial Average and a top-10 payer in the S&P 500. However, concerns surrounding the company’s substantial debt burden have led some to question its ability to sustain this payout over the long haul.
The telecom titan’s debt is poised to swell further following its $20 billion all-cash acquisition of Frontier Communications. Nevertheless, Verizon has taken a proactive step to fortify its financial flexibility by monetizing its tower assets, generating a $3.3 billion windfall. This strategic move will help alleviate debt concerns and bolster its balance sheet.
As of the second half of this year, Verizon’s total debt stood at $149.3 billion, with net debt amounting to $122.8 billion. While these figures may appear daunting, the company’s net-debt ratio of 2.5 times is relatively manageable, especially when compared to rival AT&T’s higher-leverage ratio of nearly 2.9 times.
Verizon’s stronger financial footing has enabled it to make a bold move in the fiber market, proposing a $20 billion deal to acquire Frontier Communications. This acquisition will not only expand its scale by adding 2.2 million fiber customers but also enhance its ability to grow its fiber business, ultimately reaching 25 million premises. The expected $500 million in cost synergies will also provide a significant earnings boost.
Although the Frontier deal may temporarily delay Verizon’s ability to achieve its long-term leverage target of 1.75 to 2.0 times, the company is taking proactive steps to accelerate its de-leveraging process. By cashing in on its tower assets, Verizon is poised to reduce its debt level ahead of the acquisition, positioning itself for long-term success.
The company’s dividend track record is equally impressive, with 18 consecutive years of annual dividend increases – the longest streak in the U.S. telecom sector. While concerns surrounding the Frontier deal’s impact on Verizon’s dividend growth may have arisen, the tower transaction has alleviated these worries, reinforcing the thesis that Verizon can continue to pay a robust and growing dividend.
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