Why Verizon stock hit the market on Tuesday

In a bearish Tuesday for U.S. stocks, incumbent telecom stocks Verizon (See 2.75%) managed to land well in positive territory. On speculation that the company was about to raise its already sizeable dividend, investors snapped up the stock. This pushed the share price almost 3% higher on a day when S&P 500 the index was in the red, down more than 2%.

Dividend increase on the way, analysts say

That morning, a team of white-shoe investment bank analysts Morgan Stanley thought Verizon was days away from declaring a dividend increase. Forecasters said such an announcement would take place on Thursday, September 5. Morgan Stanley anticipates an annual increase of $0.05 per share to the telecom major’s quarterly common stock payout, putting the next quarterly distribution at nearly $0.68 per share.

If realized, such an increase would be in line with Verizon’s recent dividend increases. While the company is a frequent raiser, steadily adding to its payout each year, its bumps tend to be small. Quarterly, the most recent, reported last September, was just over $0.01 per share.

While Verizon is an efficient, highly profitable telecom provider and has good fundamentals, the shareholder distribution is clearly a major part of its appeal to many investors. It is a high-yielding dividend at a rate of nearly 6.3%; this rate would remain unchanged with an annual increase of $0.05.

The company can afford it

Verizon’s cash flow is thick and heavy because it operates a business with millions of paying subscribers on a regular basis. That means it has plenty of financial muscle, helping it flex that big dividend. Currently, the cash dividend payout ratio is below 80%, which indicates that the distribution is well funded and sustainable, barring any sudden catastrophe with the company.