In 2002, “Can you hear me now?” became an iconic catchphrase. Its popularity lasted for a decade.
It rose to fame because of one brilliant advertising campaign.[ad#Google Adsense 336×280-IA]The commercials, which ran until 2011, featured “Test Man” traveling around the U.S. testing his mobile phone connection.
He repeated the question nearly all of us have screamed into our cellphones at one point or another – especially when we lose our signal.
The company behind the well-known TV spots was Verizon Communications Inc. (NYSE: VZ).
But this year, Verizon lost Test Man to a competitor. The actor began appearing in Sprint commercials.
Verizon investors might wonder if the move signals bad news for the telecom giant. Should they worry about Verizon losing its $2.26 annual dividend as well? Let’s take a look.
Cash Flow Coverage
Verizon’s cellphone customers expect fast, reliable network coverage across the U.S. But when it comes to dividend safety, we have to analyze a different type of coverage.
The SafetyNet system measures free cash flow, or the amount of money the company actually makes from running its business.
Free cash flow is calculated by subtracting capital expenditures from cash flow from operations.
Cash keeps a company’s business operations and dividends flowing.
Verizon has plenty of it.
Last year, Verizon recorded $21.16 billion in free cash flow. That’s up 57.44% from the $13.44 billion it generated in 2014. And 38.21% more than the $15.31 billion it banked in 2012.
But this year, free cash flow is expected to fall 27.84% to $15.27 billion.
The drop is attributed to Verizon’s recent six-week strike. The company was hit with massive costs, like paying overtime to employees covering for the 46,000 workers on strike. Revenue growth also stalled because Verizon’s employees focused on repair and maintenance instead of new installations.
Although the strike hurt short-term earnings and cash flow, Verizon’s free cash flow is expected to rise again next year.
A Loud and Clear Track Record
Verizon has paid a dividend since 1984, when it was called Bell Atlantic. It was one of the seven “Baby Bells” that spun off of AT&T Inc. (NYSE: T).
And it’s raised its dividend every year for the last decade.
The company’s long dividend history demonstrates stability and has helped offset the temporary dip in free cash flow.
A Payout Ratio With Plenty of Bandwidth
To further evaluate a dividend’s likelihood of getting cut, our system considers the company’s payout ratio, which is calculated by dividing dividends by free cash flow.
In 2015, Verizon investors received $8.54 billion in dividends. This year, Verizon is expected to pay out $9.29 billion in dividends.
Using this formula, Verizon’s 2015 payout ratio was 40.36%. This year, it’s projected to be 60.84%.
Both payout ratios are well below our 75% threshold.
We look for a payout ratio below 75% because it gives the company a buffer. It’s not using all of its free cash flow to pay shareholders a dividend. So, even if the company has a bad quarter or year, it can still afford to pay and maybe even raise its dividend.
It doesn’t look like investors need to worry about Verizon’s dividend falling into a dead zone any time soon. Too bad I can’t say that about my own cellphone coverage.
Verizon’s dividend is safe.
Dividend Safety Rating: A
Source: Wealthy Retirement