The pullback in Verizon Communications Inc. this year raised its dividend yield to “by far” its highest level in 10 years, at 5.8%, and Morgan Stanley analyst Simon Flannery expects the company to increase its dividend payout soon.
has increased its dividend annually for the past 15 years, and Flannery thinks the company could announce its next increase, of perhaps 2%, around Sept. The telecom giant last announced an increase in its dividend on September 2, 2021.
The company’s dividend is “well covered,” according to Flannery, representing a payout of approximately 50% on earnings and a payout of 58% on 2022 free cash flow.
He noted that the company may also see capital spending spike this year, which “should help the company deliver and approach the 2.25x unsecured leverage level where buybacks can kick in.”
“Right now, Verizon doesn’t seem ready to launch buybacks for a few more years, but it’s possible they will reconsider that stance, especially as free cash flow accelerates in 2023 and beyond,” he continued.
Flannery discussed the company’s positioning in a note to clients titled: “Is Verizon oversold ahead of a dividend increase?” But even as the stock trades near its $42 low after a 16% year-to-date decline, he maintains his equal weight rating for the stocks, writing that he doesn’t see “a strong catalyst to drive a recovery”. -rating in the short term.”
See also: Verizon has ‘few palatable options’, says analyst in downgrade
Verizon’s stock performance this year comes on the back of cuts in the company’s outlook and a tough competitive landscape in the wireless market like Comcast Corp. CMCSA,
and Charter Communications Inc. CHTR,
make inroads with its own consumer plans, which leverage Verizon’s network through a mobile virtual network operator (MVNO) agreement.
“The US wireless industry continues to grow at a healthy pace, adding 2.2 million postpaid phone customers in the last quarter, but Verizon accounted for only 12,000 of that total, although it serves as a wholesale supplier to Comcast and Charter, which added more than 600,000 in the last quarter. ,” wrote Flannery.
He thinks Wall Street is looking for signs of improvement in several areas. On the one hand, after Verizon recently cut its outlook, Flannery believes investors “will be reluctant to intervene until they feel the estimates are risky enough.”
Additionally, he notes that investors are likely to want to see better gross addition and net addition trends, although the outlook is difficult amid Sprint’s low turnover, “aggressive” deals from AT&T Inc. T,
aimed at retaining subscribers, and the invasion of cable companies.
“[I]Investors are concerned that if the wireless industry slows down, Verizon’s subscriber trends could turn negative,” he wrote.
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