Verizon: The Largest Dividend In The World

Verizon Wireless is owned 55% by Verizon (NYSE: VZ) and 45% by UK-based Vodafone (NYSE: VOD). Yesterday, the cellular service provider said it would pay a dividend of $10 billion next year. The size of the figure is extraordinary. It raises the question of what Verizon will do with its $5.5 billion, and the phone company’s shareholders should be particularly interested.

The existence of Verizon Wireless is due to a strange turn of events nearly a decade ago. Vodafone was a burgeoning cellular provider in America. Verizon was in the midst of early competition with AT&T (NYSE: T), Sprint and Nextel before they merged, as well as a slew of smaller companies. All were in a fight for business in the U.S. market, which was still relatively immature, at least compared to now.

Verizon and Vodafone merged their cellular operations for many of the same reasons that AT&T is about to buy T-Mobile. It is often cheaper to buy customers by the millions than to try to fight for them one-by-one.

Verizon has run up a long list of expenses in the last four years. The largest is led by its $20 billion plus investment to build a fiber-to-the-home competitor to cable TV and broadband services. Subscriptions to the product have grown more slowly than Verizon supposed. The company’s $5.5 billion payout from Verizon Wireless could be used to reduce some of the debt incurred by the costs to create that infrastructure.

Verizon could also turn that money back to its shareholders. The company already has a dividend payout with a current yield of 5.2% — high by the standards of other huge American public companies. Verizon’s stock holders can complain the dividend is not enough. The telecom’s stock is up only 12% in the last two years while the S&P is 33% higher.

Verizon’s best years may be behind it, which is another reason it should return money to those who own its stock. The company’s wireline business erodes rapidly now. People do no want home phones in many cases when VoIP products or cellphones will do. Wireless subscriber growth in the U.S. has ended. There are 250 million total wireless customers in America. That leaves AT&T, Verizon, and Sprint-Nextel (NYSE: S) to fight over a stagnant market.

Verizon may not be able to offer shareholders much in terms of an improvement in its share price. At least it can send them checks because of its good fortune.

Douglas A. McIntyre