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.
Enterprise Products Partners L.P. (NYSE:EPD) had entered into a joint-venture with Enbridge Energy Partners, L.P. (NYSE:EEP) and Anadarko Petroleum Corporation (NYSE:APC) in 2011 for constructing the Texas express pipeline. Under this joint-venture, Enterprise Products Partners L.P. (NYSE:EPD) has a 50% ownership interest. The construction of this pipeline is expected to be completed by the second quarter of 2013. The pipeline is 580 miles long, stretching from Skellytown to Mont Belvieu. The initial transporting capacity of this pipeline will be 280,000 barrels of NGL per day, and it will be capable of expanding up to 400,000 barrels per day. This pipeline will start generating revenue in 2014.
With these capacity expansions, the revenue-generating abilities of the company will increase. Furthermore, it is estimated that the free cash flow to equity of Enterprise Products Partners L.P. (NYSE:EPD) will be around $1.8 billion in 2014.
A company focusing on growth through capital expenditure
In the first-quarter results announcement this year, AT&T Inc.(NYSE:T) reiterated its focus on Project VIP. It has already invested $4.3 billion in the first quarter. Moving forward, the investment in 2014 and 2015 will be $20 billion per year. This indicates a saving of $4 billion from the levels announced last year. The company expects its 270 million customers to be on the LTE network by the end of 2013. The driver of the Project VIP, mobile data, and the smartphone subscribers, will continue to grow significantly because of this improved network.
AT&T Inc.(NYSE:T) used to upgrade its customers phones and services that are purchased directly from its stores in a period of 20 months. Recently, AT&T Inc.(NYSE:T) announced an increase in the time period of upgrading phones and services, to 24 months. The company announced that this amendment will be on a prospective basis and will be applicable to all the new and existing customers. The company experiences the maximum number of upgrades in the fourth-quarter of every year. Due to this change, the analysts estimate that AT&T Inc.(NYSE:T) will have to upgrade 1 million fewer equipment and services in the current year’s fourth-quarter, saving $400 million.
Conclusion
The acquisition of Wind Mobile will make Verizon a key foreign player in the Canadian telecom market because of the oligopolistic nature of telecom market in Canada. Also, with the acquisition of 45% of Vodafone’s stake in its wireless business, it will become the 100% owner of its wireless business. Thus, the future growth prospects of Verizon look promising.
With several joint-venture projects ready to kick-start in late 2013, Enterprise Products Partners will benefit from these projects in 2014 and 2015.
Project VIP will increase AT&T Inc.(NYSE:T)’s future cash flow generation capacity as it improves the company’s subscriber base. Also, the cost reduction strategy will help it to save $400 million in the current year. With this, it is expected that the company will declare higher dividend in 2013 and 2014.
Thus, I recommend a buy on all three stocks for investors seeking regular income.
The article 3 Companies With High Dividend Payout Ratios You Don’t Want to Miss originally appeared on Fool.com and is written by Shweta Dubey.
Shweta Dubey has no position in any stocks mentioned. The Motley Fool recommends Enterprise Products Partners L.P. Shweta is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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