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Verizon's Dividend Outlook Clouded by Frontier Acquisition Debt

Verizon has raised its dividend for the 18th consecutive year, yielding over 6.5%. However, a significant $20 billion acquisition of Frontier Communications is set to increase its debt, complicating plans to continue this trend in the near future, according to a recent report.

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AI Rating:   5

Dividend Yield and Growth: Verizon's current dividend yield is over 6.5%, significantly above the S&P 500 average of less than 1.5%. The company has successfully increased its dividend for 18 consecutive years, showcasing its commitment to returning capital to shareholders.

Free Cash Flow (FCF): A key driver behind Verizon's ability to continue increasing its dividend has been its improving free cash flow, which has seen an increase in excess cash produced this year compared to last. Specifically, Verizon produced $2.9 billion in excess free cash flow through the first half of 2024, up from $2.5 billion during the same period the previous year.

Debt and Leverage Ratio: Verizon's planned acquisition of Frontier Communications for $20 billion will significantly raise its leverage ratio from 2.5x to about 3.0x after the deal's closure, delaying its ability to repurchase shares and putting pressure on dividend growth in the short term. This is a notable shift as the company was on track to reach a leverage target of 2.25x, which would have allowed for share repurchase programs. Additionally, this increased leverage level poses risks to the ongoing dividend policy.

Credit Ratings: Despite the increased leverage, Verizon's credit ratings remain strong, with S&P Global rating it at BBB+ and Fitch at A-. These ratings indicate that while the company faces increased debt, it retains a solid financial foundation to manage it effectively.

Market Competitiveness: The acquisition of Frontier is seen as a strategic move to bolster Verizon's fiber business and to compete more effectively with AT&T. By enhancing its fiber network, Verizon aims to grow its subscriber base significantly, which could provide future revenue growth and help absorb the costs associated with the acquisition.

Conclusion: In summary, while Verizon has established itself as a strong dividend payer with solid free cash flow and a longstanding dividend increase streak, the new acquisition poses potential risks to its financial strategy moving forward. Investors may need to weigh the immediate implications of higher debt against the long-term benefits of expanded market presence.

Stocks:  VZ FYBR T