Two years in the past, I analyzed Verizon‘s (NYSE: VZ) dividend security and rated it an “A.” It was very secure.
However can we are saying the identical at the moment? Let’s take a look.
An important metric that we have a look at right here at Security Web headquarters is free money circulation. Whereas Verizon has a lot of it, it has been producing much less and fewer over the previous few years.
This yr, free money circulation is anticipated to rise to $16.9 billion from final yr’s $14 billion, which was the bottom since 2017. However you possibly can see that since 2020, the development has been decrease.
The Security Web mannequin penalizes corporations for declining money circulation. It’s a troubling signal.
One other essential metric that we scrutinize is the payout ratio. That is the share of free money circulation that’s paid out in dividends.
I need to see the payout ratio be 75% or decrease. In different phrases, I’m not comfy with corporations paying out greater than 75% of their free money circulation to shareholders. That’s as a result of if money circulation slips, like we’re seeing with Verizon, it makes it more durable to afford the dividend.
Final yr, Verizon’s payout ratio was 77% – simply above my 75% threshold. This yr, as a result of free money circulation is forecast to rise, the payout ratio is projected to be 66%, which is again inside my consolation zone.
Verizon has raised its dividend yearly for the previous 16 years. Administration acknowledged as not too long ago as final week that dividend development is its goal and it expects to extend the payout once more this yr.
The corporate’s yield is spectacular at 6.7%, and if administration does what it says, the yield will probably be even larger (based mostly on at the moment’s worth).
So we’ve an organization with a wonderful monitor file, and if free money circulation is available in near the place Wall Avenue expects, it ought to make the dividend very inexpensive and secure.
However till it does, we’ve to go together with the numbers which have really been reported, not what’s anticipated. And the numbers from the previous few years aren’t stellar, which implies the dividend is now not as rock-solid because it was two years in the past.
I gained’t be shocked if subsequent yr right now, Verizon’s dividend security ranking has been upgraded. However till the 2023 numbers are available, the dividend isn’t as secure because it as soon as was.
Dividend Security Ranking: C
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