Verizon (NYSE: VZ) is known for its substantial dividend, yielding over 6%, making it the highest-yielding stock in the Dow Jones Industrial Average and one of the top payers in the S&P 500. However, concerns about the company’s rising debt have led to speculation over the sustainability of its payout in the long term.
Verizon's debt is set to increase further after it agreed to acquire Frontier Communications (NASDAQ: FYBR) in a $20 billion all-cash deal. To mitigate this, Verizon recently made a strategic move to monetize its tower assets, securing $3.3 billion to boost its financial flexibility.
Starting from a Position of Strength
Verizon ended the second half of the year with $149.3 billion in total debt (or $122.8 billion in net debt). While this is a considerable amount, the company is well-positioned to manage it. Verizon’s net-debt ratio is 2.5 times, which is lower than its competitor AT&T (NYSE: T), which has a similar debt load but a higher leverage ratio of nearly 2.9 times. AT&T aims to reduce its leverage to 2.5 times by early next year, while Verizon has set a more ambitious target of bringing its leverage down to between 1.75 and 2.0 times in the long term.
Verizon's healthier balance sheet has enabled it to make a strategic move to improve its competitive position in the fiber market, particularly against AT&T. Its $20 billion acquisition of Frontier will expand its fiber business by adding 2.2 million new customers and allowing it to reach 25 million premises. The deal is expected to boost earnings, with $500 million in projected cost synergies.
However, this acquisition will delay Verizon's ability to hit its leverage target. Fitch Ratings projects that Verizon's leverage ratio will be around 2.3 times upon the deal’s closing next year, rising temporarily before declining toward its long-term goal.
A Boost to Debt Reduction
While Verizon could have reduced its debt solely through post-dividend free cash flow and earnings growth, it decided to expedite the process by monetizing part of its tower portfolio.
Verizon has signed a deal with Vertical Bridge to lease, operate, and manage 6,339 wireless towers in the U.S. for $3.3 billion. The transaction is structured as a prepaid lease, providing Verizon with about $2.8 billion in upfront cash. Verizon will continue to lease capacity on the towers for at least 10 years, while Vertical Bridge gains the right to lease space to other tenants.
This cash infusion will help Verizon reduce its debt before closing the Frontier acquisition, putting the company in a stronger position to manage its financial obligations. It also accelerates its path to achieving its long-term leverage goals. Verizon may further reduce debt by selling additional non-core assets, such as more towers or fiber assets.
A Smart Strategic Move
Verizon has been a consistent performer when it comes to dividends, recently announcing its 18th consecutive annual dividend increase, the longest dividend-growth streak in the U.S. telecom sector. Although the Frontier acquisition has raised concerns about the impact of increased debt on Verizon’s dividend, the tower deal provides reassurance that the company can continue paying—and potentially growing—its substantial dividend.
While some analysts have cautioned against investing in Verizon due to its debt load, others see its strategic moves, like the tower sale, as a reason for optimism about the company’s ability to maintain its generous payout.
Verizon Makes a $3.3 Billion Deal to Help Protect Its Towering Dividend was originally published by The Motley Fool.
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