Dividend payments, a way to distribute cash to the shareholders, indicates the strength of a company’s free cash flow position. Historically, high dividend-paying stocks have outperformed the overall stock market in times of uncertainty. In the U.S, high-dividend paying stocks have provided an additional return of almost 5% annually as compared to stocks paying no dividend.
In this article, I have analyzed three companies that had paid higher dividends in the past and will continue their policy of higher-dividend payments in the future due to their strong free cash flow positions. Here is a table showing the each company’s expected dividend payout ratio for 2013.
| Company | 2013 |
|---|---|
| Verizon Communications (NYSE:VZ) | 74.00% |
| Enterprise Products (NYSE:EPD) Partners | 96.20% |
| AT&T (NYSE:T) | 71.60% |
A company seeking inorganic growth
Recently, Verizon Communications Inc. (NYSE:VZ) expressed its interest in entering the Canadian telecom market by acquiring Wind Mobile. Currently, the Canadian telecom market is largely dominated by three telecom giants: Rogers Communications Inc. (USA)(NYSE:RCI), BCE Inc. (USA) (NYSE:BCE), and TELUS Corporation (USA) (NYSE:TU). This region has a total subscriber base of nearly 26 million, out of which Wind has 600,000 subscribers. With the upcoming spectrum auction of 700 megahertz in January next year, analysts expect Verizon Communications Inc. (NYSE:VZ) to have a higher penetration rate. This will increase the subscriber base of Verizon Communications Inc. (NYSE:VZ) in the Canadian telecom market.
Also, with the upgrades of HSPA+ networks and the rapid extension of 4G LTE platforms, the data revenues for telecom operators in Canada are expected to grow at the rate of 35%-45% in 2013 and 2014.
Verizon Communications Inc. (NYSE:VZ) is considering the purchase of 45% of the stake held by Vodafone Group Plc (ADR) (NASDAQ:VOD) in its wireless business. Analysts expect that the purchase consideration will be met by raising 50% debt, and the remaining 50% will be a stock-for-stock transaction. This funding arrangement will dilute the existing shareholding pattern of Verizon Communications Inc. (NYSE:VZ)’s equity shareholders. Moreover, as Verizon Communications Inc. (NYSE:VZ) is a high dividend paying company, this step will strengthen Verizon’s free cash flow position as it will not be further required to distribute any dividend to Vodafone Group Plc (ADR) (NASDAQ:VOD) shareholders .
Looking at the growth prospects of Verizon, its free cash flow to equity is expected to be $11.44 billion and $9.8 billion in 2013 and 2014, respectively. These high levels of free cash flow indicate Verizon’s ability to pay a higher dividend in the future.
Joint-ventures to be the revenue driver
On June 12, 2013, Enterprise Products Partners L.P. (NYSE:EPD) entered into a joint-venture with Gas Partners to own Natural Gas Liquid, or NGL, fractionation trains 7 and 8. Fractionation is a process that is used to clean natural gas by removing impurities and non-methane hydrocarbons. Under this joint-venture, Enterprise Products Partners L.P. (NYSE:EPD) will own 75% of the interest in these trains, while Western Gas Partners (NYSE:WES) will own the remaining 25%. The company expects these trains to start commercial production in the current year’s fourth quarter. With addition of both these trains, Enterprise Products Partners L.P. (NYSE:EPD) will be able to fractionate 650,000 barrels of NGL per day.
