Verizon (VZ), the largest US wireless carrier, has increased its quarterly dividend by 3.3% to 47.5 cents per share, equating to approximately 6.3% yield. Annualized, this increases the company’s dividend to $1.90 per share, reflecting 6% growth from the current dividend of $1.84 per share. The quarterly dividend is payable on November 2, 2009, to the shareholders of record as of October 9, 2009.

This represents the third consecutive year Verizon has increased its dividend payout in September. The wireless giant raised its quarterly dividend by 7% in September 2008 to 46 cents per share, increasing annual payout by 12 cents per share to $1.84 per share.

Verizon remains committed to offer incremental returns to its shareholders leveraging  a heathy free cash flow (cash flow from operations minus capital expenditures). The company reported free cash flow of $6 billion in first-half 2009, reflecting a $1.8 billion increase from the corresponding period a year ago. Verizon distributed $2.6 billion as dividends to its shareholders in first-half 2009, representing approximately 43% of the free cash flow for the period.

The company’s continued efforts to maximize shareholder returns is encouraging, especially considering the current volatile macro-economic backdrop which has prompted many companies from different industries to reduce or suspend dividend payments to conserve cash.

Verizon’s latest initiative to raise its dividend follows the company’s tepid operating results in the second-quarter of 2009, highlighted by a 21% year-over-year decline in earnings due to rising costs and decelerating wireline voice business. However, the decline in wireline was offset by healthy gains across strategic growth areas such as wireless, broadband Internet and video.

Verizon’s superior network coverage and aggressive marketing scale have fostered sustained growth in its wireless operations. The acquisition of Alltel Corp, which has enabled the company to dethrone its archrival AT&T (T) from the top position in the US wireless market, continues to boost overall revenue. Net subscriber additions at Verizon Wireless remains strong, and churn (customers switching to competitors) continues to be one of the lowest in the industry.

Moving forward, we believe Verizon’s business prospects to be driven by synergies from acquisitions (especially Alltel), leadership in 3G wireless and increased market penetration of its FiOS broadband and TV services. Moreover, the stock remains attractive for income-oriented investors based on a healthy dividend yield.
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