Can Verizon Raise Dividend Indefinitely? (VZ, T)

Verizon Communications Inc. (NYSE: VZ) did not immediately rise despite the announcement from the company that it was raising its quarterly dividend.  Most dividend hikes do not raise the price of stocks immediately, but this 3+% rise in the dividend is an interesting one because this is the third straight year that the company has raised its dividend.  The new dividend is $0.475 per share per quarter,  up from a $0.46 dividend for the last four quarters and a $0.43 dividend before that.

Some may point out that this is actually the smallest dividend hike compared to the two prior dividend hikes.  Frankly, in today’s business and economic climate that is a whiners’ argument that is no different than lottery ticket winners complaining about all the taxes they will have to pay.  What we want to see is how much it can grow down the road.   And just as importantly, we wanted to see how this stacks up against rival AT&T Inc. (NYSE: T) and its dividend history and the future dividends.

In order to look at dividend growth projections, the first thing we do is look at a company’s earnings power and cash balances.  Because of deals Verizon’s cash balance has contracted over the last year.  But despite the economy and the woes of telecom and communications companies competing with a whole new slate of competitors, Thomson Reuters is still looking for growth at Verizon in 2009 and in 2010.  The 2008 income was $6.428 billion on revenues of $97.35 billion.  For 2009 and 2010, the Thomson Reuters estimates are as follows:

• 2009 estimate is $2.53 EPS and $107.8 billion in revenues.
• 2010 estimate is $2.64 EPS and $109.3 billion in revenues.

Those estimates have drifted marginally lower over the last few months, but the expectation is still for some growth.  The new dividend comes to an annualized figure of $1.90.  There is plenty of dividend coverage here in Verizon’s forward earnings if it gets anywhere close to those estimates.  $1.90 compares to $2.53 expected in 2009 and $2.64 expected in 2010.  Based upon that growth, there is no reason to not expect that Verizon could bump its quarterly dividend by a similar amount in another year.  The new dividend rate based on a $30.10 share price is 6.31%.

There is a reason Ivan Seidenberg was named back at the end of 2007 as our top pick for CEO of the Year.  This is just one of those reasons.

AT&T pays a $0.41 dividend and that has also been bumped up along with Verizon’s dividend throughout time. Based upon a $25.05 price, AT&T’s annualized dividend of $1.64 it has a dividend yield of 6.54%.  AT&T is up about 20% from its 52-week lows, while Verizon stock is up about 30% from its 52-weeks lows.  As far as AT&T’s ability to keep bumping its payout, that $1.64 current annualized dividend also has enough coverage if it gets anywhere close to estimates as Thomson Reuters is looking for $2.08 EPS in 2009 and $2.22 EPS in 2010.

We might not see the continued mega-hikes in payouts from the telecom giants, but in today’s world it should probably be viewed as “good enough” that some DJIA components are still raising their dividends.   AT&T and Verizon, and maybe throw in the cable companies, are looking more and more like utilities.  But with dividend yields of 6.5% and with some growth expected for 2010 from 2008 and 2009, even if due to to deals, offers something for dividend investors, defensive stock investors, and value investors…

Jon C. Ogg
September 3, 2009