Verizon (NYSE: VZ) pays a sky-high dividend. The telecom giant’s payout yields more than 6%, making it the highest-yielding member of the telecom giant Dow Jones Industrial Average (and a top-10 payer in the S&P500). One of the factors driving the high yield is concern that the company’s high debt load could impact its ability to sustain that payout over the long term.
The company’s debt is on track to rise further after it decided to buy Border communication (NASDAQ: FYBR) in a $20 billion all-cash deal. Recently, however, the company has taken a counter-action to cash in on the value of its tower assets, which will generate $3.3 billion to help increase its financial flexibility.
Starting from a strong position
Verizon ended the second half of this year with total debt of $149.3 billion (and net debt of $122.8 billion). While that’s a lot of debt in absolute terms, the telecom giant can handle that level. The net debt ratio was 2.5 timesthat is lower than telecom rival AT&T (NYSE:T). Although AT&T had a similar debt load ($126.9 billion in net debt), it had a higher leverage ratio of almost 2.9 times. AT&T is committed to it get his leverage ratio down to the 2.5x range in the first half of next year. Meanwhile, Verizon has set an even lower long-term target of 1.75 to 2.0 times. whatever it originally referred to to be achieved next year.
Verizon’s stronger balance sheet has recently allowed the company to make moves focused on improvement its competitive position compared to AT&T in the field of fiber optic. The company’s proposed $20 billion deal for Frontier will increase scale by adding 2.2 million fiber customers. It will also increase its ability to grow its fiber business, reaching 25 million branches. The deal should also boost Verizon’s revenue, given its expected $500 million in cost synergies it expects to realize.
However, the deal will delay Verizon’s ability to achieve its leverage target. Credit rating agency Fitch expects Verizon’s leverage ratio to be around 2.3 times by the time it completes the Frontier acquisition next year. It will then spring back upwards in the middle of the 2.0 times range before continuing steadily falling back to its long-term goal.
An accelerator for debt reduction
Verizon could have deleveraged its balance sheet solely with free cash flow and post-dividend earnings growth. However, it is taking a step to accelerate its ability to eventually reach its leverage target by cashing out some of its tower assets.
The company agreed to give Vertical Bridge exclusive rights to lease, operate and manage 6,339 wireless communications towers in the U.S. for $3.3 billion. The structure of the deal is a prepaid lease with upfront proceeds of approximately $2.8 billion in cash. In any case, Verizon will lease back the capacity on the towers for at least a minimum 10 years. In the meantime, Vertical Bridge will have the ability to sign leases with additional tenants for those towers.
This upfront cash payment will help reduce Verizon’s debt burden ahead of the Frontier acquisition. It will put the company in an even stronger position to handle that transaction, expanding its capabilities to ultimately achieve its long-term leverage objective.
Verizon could sell other non-core assets in the futureincluding additional cell towers and some non-core fiber assets. That would further accelerate the ability to reach the target leverage level.
A smart move
Verizon has been a great one dividend stocks over the years. It recently achieved its 18th straight annual dividend increase, making it its currently longest dividend growth streak in the US telecom sector. While the Frontier deal Concerns have arisen that a rebound in debt levels could threaten dividend growththe tower transaction should help alleviate these concerns. It reinforces the case that Verizon can continue to pay a sky-high dividend that should continue to grow.
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Matt DiLallo holds positions at Verizon Communications. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
Verizon makes $3.3 billion deal to protect its sky-high dividend was originally published by The Motley Fool
