Davenport & Co. analyst F. Drake Johnstone today cut his rating on Verizon (VZ) to Neutral from Buy, citing concerns that cash flow constraints will make it difficult to increase its dividend payout.
Johnstone notes that the company at some point in the next two years will begin paying out 45% of the free cash flow from Verizon Wireless to joint venture partner Vodafone (VOD). Once that happens, he contends, the current dividend will consumer most of the company’s free cash flow, leaving little room for dividend increases. “We believe that investors will be more attracted to other telecommunications carriers such as Bell Canada and European carriers that have significant free cash flow and plenty of room to increase their dividend payments over the next several years,” he writes in a research note.
He also contends that VZ shares look expensive relative to other carriers. If you take out the 45% share of Verizon Wireless cash flows attributed to Vodafone, the company trades at 5.7x 2010 EBITDA, above Bell Canada at 4.8x and Telefonica at 5.1x. Ex Vodafone’s VZW stake, he adds, Verizon has only a 3.7% free cash flow yields, versus 6.8% for Bell Canada, 8.3% for Telefonica and 10% for Vodafone.
VZ today fell 47 cents, or 1.7%, to $27.49.
Earlier: AT&T Could Lose 40% Of iPhone Subs To Verizon, Davenport Says
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