Verizon’s dividend yield is ‘by far’ its highest level in a decade, and a hike could be imminent

The withdrawal of Verizon Communications Inc. stock. this year brought its long-term dividend yield to a 10-year high of 5.8%, and Morgan Stanley analyst Simon Flannery expects the company to increase its dividend payout soon.

Verizon VZ,
+0.18%
has raised its dividend annually for the past 15 years, and Flannery believes the company could announce its next increase, perhaps to the tune of 2%, around Sept. 1. The telecom giant last announced a boost to its dividend on September 2, 2021.

The company’s dividend is “well covered,” according to Flannery, representing a roughly 50% payout on earnings and a 58% payout on free cash flow in 2022.

He noted that the company could also see capital spending peak this year, which “should help the company yield and get closer to the 2.25x unsecured leverage level where acquisitions may begin.”

“At this point Verizon doesn’t appear ready to initiate repurchases for a few more years, but it’s possible that it could reconsider that position, especially as free cash flow accelerates in 2023 and beyond,” he continued.

Flannery discussed the company’s position in a note to clients titled: “Is Verizon Oversold Ahead of a Dividend Push?” But even with shares trading near the bear case of $42 after falling 16% year-to-date, he maintains his equal weight rating on the stock, writing that he doesn’t see “a strong catalyst to drive an up-rating in the near term .”

See also: Verizon has ‘few palatable options,’ downgrade analyst says

Verizon’s stock performance this year comes after cuts to the company’s outlook and a tough competitive landscape in the wireless market as Comcast Corp. CMCSA,
-0.35%
and Charter Communications Inc. CHTR,
-0.67%
are making inroads with their own consumer plans, which leverage Verizon’s network through a mobile virtual network operator (MVNO) agreement.

“The US wireless industry continues to grow at a healthy rate, adding 2.2 million postpaid phone customers last quarter, but Verizon accounted for only 12,000 of that total, although it acts as a wholesale provider for Comcast and Charter which added over 600k in the last quarter. ,” Flannery wrote.

He believes Wall Street is looking for signs of improvement in many areas. First, since Verizon recently cut its outlook, and Flannery believes investors “will be reluctant to step in until they feel that valuations have been sufficiently discounted.”

In addition, he notes that investors likely want to see better gross and net addition trends, although the landscape is difficult amid lower variance from Sprint, “aggressive” deals from AT&T Inc.
-0.28%
in order to retain subscribers and encroach on cable companies.

“[I]Investors are concerned that if the wireless industry slows, Verizon’s solid subscriber trends could turn negative,” he wrote. “We’ll be watching carrier deals closely ahead of the September 7 iPhone launch.”

See More: Apple plans September 7 event expected to mark iPhone 14 debut

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