The telecommunications giant appears to be in a strong position to extend its streak of 18 consecutive dividend increases.
Many investors did not like it Verizon Communications‘ (See -1.15%) third quarter update Tuesday. It is obvious from the value of Verizon that drops around 5% after the telecommunications giant reported its Q3 results.
But some investors should be pleased with Verizon’s latest update. For what? The company gave good news to income investors who love its ultra-high dividend yield of nearly 6.5%.
The numbers that matter to income investors
Verizon reported Q3 revenue of $33.3 billion, year-over-year and slightly below the consensus estimate of $33.5 billion. It posted adjusted earnings per share of $1.19. Although that was down from adjusted earnings per share of $1.22 in the prior-year period, it met the average analyst estimate of $1.18 per share.
Wall Street analysts also focused on other figures in Verizon’s Q3 update. For example, the company reported a total of 363,000 fixed wireless network additions, bringing its subscriber base to nearly 4.2 million. This growth allowed Verizon to reach its fixed wireless subscriber goal of 4 million to 5 million, 15 months ahead of schedule.
However, these are not the numbers that matter to income investors. Instead, they are more concerned with the financial metrics that make the difference in Verizon’s dividends that continue to flow and grow. And Verizon provided reasons to be confident about its dividend program in its Q3 update.
CEO Hans Erik Vestberg said in the Q3 results call that Verizon posted the highest earnings before interest, taxes, depreciation and amortization (EBITDA) in the company’s history. CFO Tony Skiadas noted that Verizon is on track to meet or exceed the midpoint of its guidance range for full-year adjusted EBITDA.
Skiadas added, “This strong EBITDA led to free cash flow of $14.5 billion year-to-date, and this is consistent with the prior year.” It pointed out that year-to-date free cash flow included an additional $2.5 billion in tax cash.
Commitment from the top
Verizon executives also expressed a strong commitment to the dividend program in the Q3 earnings call. Skiadas repeated that the first two priorities of the company’s capital allocation are investing in the business and financing the quarterly dividend.
In September, Verizon announced that it had increased its dividend for the 18th consecutive year. Skiadas said: “[O]Our goal is to put the board in a position for further dividend increases.”
How does the telecommunications company accomplish this goal? Vestberg highlighted the pending acquisition of Border communicationswhich he said would expand Verizon’s total addressable market. He also said that Verizon’s broadband, mobility and other services should allow the company to grow its EBITDA and cash flow.
Vestberg summed up his view, saying: “So all in all, we feel very positive about where we are right now. We feel positive about where the market is and our products.”
A potential fly in the ointment
I think income investors should also feel positive about Verizon’s dividend. However, there is a potential fly in the ointment.
Bank of America Analyst David Barden pointed out in the Q3 earnings call that Verizon’s tax contribution and capital expenditures are on the rise. He expressed concern that the company’s working capital could increase if iPhone upgrades take off. Barden also noted that Frontier does not generate positive free cash flow. He asked Vestberg if this year could be “the high-water mark for free cash flow at Verizon.”
Vestberg didn’t seem to agree with Barden’s hypothesis, however. He responded that Verizon has a lot of tailwinds to boost its cash flow. Skiadas added that the company remains focused on EBITDA growth, and that interest rates (which are now falling) have an impact.
Income investors should be watching to see if anything changes in Verizon’s ability to fund its dividend. However, based on its Q3 update, the company appears to be in a strong position to continue paying the dividend at current levels and extend its streak of dividend increases next year.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Keith Speights has positions at Bank of America and Verizon Communications. The Motley Fool has positions on the Bank of America board. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.