I have been slowly buying shares of Verizon (VZ 1.15%) over the past few years. The big draw for me is the telecom giant’s big-time dividend. At the current share price, it yields over 7%. That’s several times higher than the S&P 500‘s average 1.2% yield.
In addition to that lucrative income stream, I think Verizon has a lot of upside potential due to its dirt-cheap stock price. That combination of income and value is why I recently bought more of the telecom stock. Given its current valuation, I plan to load up on more shares this year.
A low-risk, high-yielding payout
High-yield dividend stocks tend to have higher risk profiles. They often have high dividend payout ratios, questionable growth prospects, and weak balance sheets. However, while Verizon has experienced some growth-related headwinds in recent years, it has a rock-solid financial profile.
Verizon produced $26.5 billion of cash flow from operations through the first nine months of last year. While that was down from $28.8 billion in the prior-year period, it covered its capital expenditures ($12 billion) with $14.5 billion to spare. That free cash flow easily funded the company’s dividend outlay ($8.2 billion), enabling it to retain cash to strengthen its already solid balance sheet.
The company ended the quarter with a leverage ratio of 2.5, an improvement from 2.6 a year earlier. Verizon has a lower leverage level than rival AT&T, which ended the third quarter at 2.8 (above its target, which is in the range of 2.5). Verizon’s leverage supports its solid investment-grade bond ratings (A-/BBB+/Baa1). The telecom’s long-term goal is to further strengthen its financial foundation by reaching an even lower leverage target in the 1.75 to 2.0 range.
Getting back to growth
Verizon is using its strong balance sheet to accelerate the growth of its fiber network by acquiring Frontier Communications in a $20 billion all-cash deal. That transaction will expand its fiber network to reach 25 million premises. The company expects the purchase — which likely won’t close until next year — to be immediately accretive to its earnings while generating at least $500 million in annual cost synergies.
The transaction will initially boost Verizon’s leverage ratio. However, the increased free cash flow following the deal will enable it to quickly reduce its debt. It will likely achieve its long-term leverage target by 2027. That could allow Verizon to launch a share repurchase program to complement its high-yielding dividend.
In addition to the future growth from Frontier, Verizon is starting to see the benefits of the heavy investments it made in expanding its broadband and 5G networks, which should continue. During the third quarter, it achieved its fixed wireless subscriber target 15 months ahead of schedule. It also delivered double-digit percentage growth in total broadband connections. These factors have the company on track to start delivering profitable growth again.
That would enhance Verizon’s ability to continue increasing its dividend. It delivered its 18th consecutive annual dividend boost late last year. That’s the longest current streak in the U.S. telecom sector. While Verizon has been delivering modest hikes (less than 2% annually in recent years), it has been able to continue growing its dividend, which is something AT&T hasn’t been able to do. (AT&T cut its payout by nearly 50% in 2022.)
An attractive value
Given Verizon’s growth issues in recent years, its share price has slumped (down nearly 30% over the past three years). Because of that, it currently trades at just 8 times forward earnings, which is significantly below the broader market’s forward P/E of more than 23. That dirt-cheap earnings multiple is why Verizon has such a high dividend yield.
I believe Verizon can supply me with an attractive stream of dividend income that should continue to rise modestly. On top of that, I think its share price will eventually recover as its earnings begin growing. Add that to the income, and I think this investment could produce solid total returns over the coming years. That’s why I’ve continued buying shares and plan to purchase a boatload more in 2025 if the stock keeps trading around its current level.
Matt DiLallo has positions in Verizon Communications. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.