Despite concerns about potential lead-remediation costs, Verizon Communications Inc. is likely to increase its dividend once again in early September, according to Morgan Stanley.
Analyst Simon Flannery expects the telecommunications company to raise its dividend by about 2%, in line with what it did a year ago. Verizon
historically announces dividend increases around this time of year, and last year marked the 16th straight year of hikes.
Flannery noted that Verizon is one of several high-yielding telecommunications names whose dividend yields exceed those of their 10-year corporate bonds.
Verizon had the largest spread of the companies within his coverage, at about 210 basis points.
“These high-dividend yields do come against a backdrop of concerns around dividend sustainability, with a dividend reduction at AT&T and elimination at Lumen last year, and now fears about lead remediation and litigation costs,” Flannery wrote. Shares of AT&T and Verizon were weighed down earlier this summer after a Wall Street Journal report explored the telecommunication’s industry’s legacy use of lead-sheathed cables, some of which are still in place.
Verizon could generate $17 billion in free cash flow this year, while its annual dividend payout could come out to about $11 billion. AT&T Inc.
has a $16 billion goal for free cash flow, and the company may end up paying out $8 billion in dividends.
“Both companies expect capital intensity to improve in 2024,” Flannery said.
While higher-yielding telecommunications stocks have come under pressure recently amid rising rates, Flannery expects they could get some relief “if, as we expect, the Fed is near the end of their tightening cycle,” meaning that rates could start to decline.
Could the third big U.S. wireless player join Verizon and AT&T among the ranks of dividend payers? T-Mobile US Inc.
signaled in its latest 10-Q that it “could elect to declare dividends in the future.” But Flannery thinks the company “still prefers to return capital via share buybacks, with a new larger buyback program expected in coming weeks.”