As a long-term shareholder of Verizon Communications (VZ), I have benefited from its dividend stream, a hallmark of stability for many income-focused investors. Over the years, however, my confidence in the company’s dividend stability has waned. While Verizon’s attractive yield initially drew me in, recent observations in my financial analysis and spreadsheet modeling have raised concerns about the sustainability of its payouts.
The Temptation of Trading Tight
Verizon’s stock exhibits minimal price volatility, with a beta of -0.01, essentially moving independently of market fluctuations. This characteristic has historically made the stock an appealing candidate for defensive portfolios. However, for those of us engaging in tactical trades—like my approach of seeking a modest 1% return between buying and selling—the low beta presents a unique challenge. Opportunities are infrequent, and the tight trading range makes the margin for error slim.
Even with my trading profits from Verizon over the years, a closer look at their financial metrics has prompted me to question whether holding for dividends remains a prudent strategy.
A Payout Ratio Under Pressure
One of the most concerning aspects is Verizon’s high payout ratio. This metric measures the proportion of earnings distributed as dividends, and a high value can signal that the company is overextending itself to maintain its dividend policy. A payout ratio exceeding 70%—let alone one approaching or exceeding 100%—suggests limited flexibility to reinvest in the business or weather economic downturns.
Analyzing My Calculations
Digging deeper into my spreadsheet calculations, I see these figures (Quarterly Change):
- 0.04298254465 (Cash from Operations Growth)
- -0.389292196 (Net Income Growth)
- -0.4112903226 (Net Profit Margin Growth)
- -0.3974358974 (Earnings Per Share Growth)
- 0.3349548297 (Price-to-Earnings Ratio Growth)
These metrics paint a troubling picture. While the Cash from Operations Growth figure is positive, indicating some resilience in Verizon’s operational cash flow, the negative growth rates in Net Income, Net Profit Margin, and EPS suggest weakening profitability. For a dividend-focused company like Verizon, such trends are alarming because dividends are ultimately funded by earnings and cash flow.
The slight increase in the Price-to-Earnings Ratio might reflect market optimism or a willingness to pay more for each dollar of earnings, but it also could signal a detachment from fundamentals. If earnings growth continues to decline, the sustainability of this valuation becomes questionable.
The Debt Dividend Dilemma
Verizon’s long-term debt poses another challenge to dividend sustainability. While leveraging debt can be strategic, particularly for a capital-intensive company, there is a delicate balance between using debt to fuel growth and overburdening the balance sheet. Rising interest rates amplify this concern, as refinancing becomes more expensive and limits cash flow availability for shareholder returns.
Should Income Investors Be Concerned?
Verizon’s dividend stability isn’t just a theoretical concern; it’s a question of risk versus reward. The stock’s yield remains attractive compared to lower-risk alternatives like Treasury bonds or money market funds. But if the company’s fundamentals don’t support the payout long-term, income investors may face a rude awakening in the form of dividend cuts or freezes.
A Technical Perspective: Verizon (VZ) Trading Near the 52-Week High
From a technical standpoint, Verizon is trading near its 52-week high of $45.36, reflecting recent bullish momentum. This movement aligns with the stock's proximity to significant Fibonacci retracement levels calculated from the past 60 days. Key levels include 0% at $45.36, 23.6% at $43.79, and 38.2% at $42.82. The current closing price of $44.34 hovers between the 23.6% and 0% retracements, indicating potential resistance as it approaches its recent peak.
Examining the 60-day EMA and mean, Verizon's price has recently surged above its 60-day EMA of $42.38 and mean of $43.02, with deviations of $1.96 and $1.32, respectively. The relatively low standard deviation of 3.27% over this period suggests subdued volatility. While this might appeal to conservative traders, it also reflects the stock's tight trading range, which has historically constrained significant upward momentum.
For dividend-focused investors, the stock’s technical behavior raises an additional layer of consideration: is this rally sustainable given the broader concerns about payout stability? As Verizon navigates its financial challenges, its ability to break out above resistance and maintain momentum will be closely tied to its next earnings performance and dividend announcements.
From my Spreadsheet;
The VZ Bulls Were Here, Moving Averages Comparisons ($ = Current Price):
My Thought
For now, Verizon remains a core part of my portfolio, albeit with a reduced allocation compared to my earlier holdings. I’ve been trimming my position over the years, prioritizing realized gains over an increasingly concerning dividend stream. As the company navigates a challenging operating environment, its ability to manage debt, reinvest in growth, and maintain shareholder rewards will dictate its future.
For myself, Verizon represents a cautionary tale about balancing yield with sustainability in competitive sector. While high dividends are alluring, they shouldn’t come at the expense of financial health. As I monitor my spreadsheet and Verizon’s quarterly reports, I remain prepared to adjust my strategy should the warning signs grow louder.
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Disclaimer: This article represents my personal analysis and opinion. It is not financial advice. Conduct your own research or consult a financial advisor before making investment decisions.
