Can Verizon Communications Inc. (NYSE:VZ) Maintain Its Current Dividend?

October 16, 2017, 12:58 pm ET, BY Simon M.- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Verizon Communications Inc. (NYSE:VZ) reported massive subscriber growth in its second quarter, which caused the company’s stock price to rally significantly. However, the stock price has been quite volatile driven mainly by varying investor sentiment towards the company, which has caused the company’s stock price to fluctuate.

Article Summary

Verizon’s free cash flow levels are being affected by price wars.

The company has impressive margins and is adding subscribers.

VZ is cutting costs, but has a huge debt burden.

Here’s the trading report on VZ.

There are several factors working to Verizon’s disadvantage, which have raised questions as to whether the company shall be able to sustain its current dividend payout. The intensifying price wars among the different carriers in the wireless telephony industry has seen the company’s margins decreasing, which has led to lower free cash flow levels in the company.

The company also has a significant debt burden, which means that it allocates a significant proportion of its gross margins, about 3-4%, as interest payment each quarter. The company’s first quarter results were also quite disappointing as the company did not add subscribers and its net margins were quite low.

However, the company recovered in the second quarter by adding about 600,000 subscribers and boosting its operating margins by incurring lower costs. The company is currently executing a cost-cutting program that has seen it reduce its operating costs, which has resulted in a massive increase to its operating margins.

The company’s competitors in the telephone industry include AT&T Inc. (NYSE:T), Sprint Corp (NYSE:S) and T-Mobile US, Inc. Verizon continues to post very high gross margins as compared to its peers, which is evidence of the company’s strong position in the its chosen industry segments.

However, the company’s future growth largely relies on subscriber growth and higher operating margins given that its revenues have been largely flat in the past few years. Verizon is keen on attracting more subscribers, which might be achieved at a cost to its current margins even as its competitors continue to wage price wars on the company.

The company might have positive future growth prospects if it continues adding subscribers, while at the same time cutting back on operating expenses. However, the question remains whether the company is a good long term investment at its current valuation, and whether the future of its dividend payout is secure.

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