Can AT&T and Verizon Keep Raising Dividends Indefinitely? (T, VZ)

AT&T Inc. (NYSE: T) has done what we expected would occur at some point soon.  Despite some bad company public relations Friday over its network, the company raised its quarterly dividend.  The old $0.41 quarterly payout was raised by 2.6% to $0.42 per quarter.  With a share price of $27.32, this comes to a yield of just over 6.1% for its annualized dividend.  What we wanted to see, same as when we covered the same sort of dividend hike at Verizon Communications Inc. (NYSE: VZ), is if AT&T and Verizon both have more room to raise their dividends in 2010 as well.

So is the AT&T dividend hike possible all over again in 2010?  For starters, this was actually the 26th consecutive year that A&T has juiced its common stock dividend higher according to the company.  That is a pretty solid track record and pretty good forecasting tool for those who follow patterns.  Presumably at the dawn of humanity, when the sun rose from the same direction after about 20 days in a row it probably became assumed that it would continue that way.

As far as the AT&T earnings coverage, this seems adequate for another hike in 2010 if AT&T meets its earnings targets.  Thomson Reuters has 2010 earnings targets at $2.24 EPS, up from $2.12 EPS for 2009.  This new higher dividend of $0.42 comes to about $1.68 per share paid out of that earnings cash flow.  If AT&T were to boost its dividend again by a penny, then at a $1.72 payout per year it still has plenty of dividend coverage considering that AT&T probably doesn’t billions and billion to grow at this point.

As far as Verizon is concerned, its dividend hike in recent months to $0.475 per quarter comes to a payout of $1.90 annually.  Its 2010 earnings estimate from Thomson Reuters was listed as $2.64 EPS on the day it was announced.  Today that estimate for 2010 is $2.50 EPS.  That isn’t   The new dividend rate was based on a $30.10 share price at the time, giving it a 6.3% yield at the time.  Based on a $32.80 price today, Verizon’s dividend yield for new share buyers is 5.8%.

The dividend coverage on AT&T is about 1.3-times and Verizon is currently about 1.3-times even after the gain and after the earnings estimates came down. In short, these are both in-line.

Everyone keeps thinking about telecom being at risk because the old copper wires into the homes and businesses are slowly going away.  That isn’t the only game they have anymore, even if these businesses are no longer high-growth operations of the past.  Dividend hikes of this sort do not sound extreme.  In fact, they are not extreme.  But this is continued evidence of how some companies can keep growing their dividends year in and year out.  Recession or not.

JON C. OGG