According to analyst Simon Flannery from Morgan Stanley, Verizon Communications Inc. is likely to announce another dividend increase in early September. Flannery anticipates that the telecommunications company will raise its dividend by approximately 2%, similar to what it did last year.
Verizon has a history of announcing dividend increases around this time of year, with last year being the 16th consecutive year of hikes. Flannery pointed out that Verizon, along with other high-yielding telecommunications names, offers dividend yields that surpass those of their 10-year corporate bonds.
Among the companies Flannery covers, Verizon has the largest spread, with a margin of about 210 basis points. However, concerns about the sustainability of these high-dividend yields have arisen due to AT&T's dividend reduction and Lumen's elimination last year. Additionally, worries about lead remediation and litigation costs have also added to these concerns.
Earlier this summer, both AT&T and Verizon saw their stock prices decline following a Wall Street Journal report that revealed the telecommunication industry's continued use of lead-sheathed cables, some of which are still in operation today.
Verizon and AT&T Expected to Generate Significant Cash Flow
Verizon and AT&T, two major telecommunications companies in the U.S., are projected to generate substantial free cash flow this year. According to estimates, Verizon could bring in approximately $17 billion, while AT&T has set a goal of $16 billion. Both companies also have plans to distribute significant dividends, with Verizon potentially paying out $11 billion and AT&T around $8 billion.
David Flannery, an industry expert, suggests that capital intensity is expected to improve for both companies by the year 2024. This positive outlook could provide further support for their dividend yields.
Potential Relief for Telecommunications Stocks
Although higher-yielding telecommunication stocks have faced recent pressure due to rising interest rates, Flannery believes they may experience some relief. He expects that if the Federal Reserve reaches the end of its tightening cycle, interest rates could potentially decline. This favorable development would likely benefit these stocks.
Could T-Mobile Become a Dividend Payer?
T-Mobile US Inc., the third-largest wireless player in the U.S., has indicated in its latest financial report that it may consider issuing dividends in the future. However, Flannery suggests that T-Mobile currently prefers to allocate capital through share buybacks. In fact, a new larger share buyback program is expected from the company in the coming weeks.
Overall, Verizon and AT&T continue to display strong potential for generating substantial cash flow and delivering significant dividends. While T-Mobile's approach may differ, the company remains an important player in the wireless industry.