Cash Is Turning Into a Hang-Up for Verizon

It is one of Wall Street's worst-kept secrets: the challenge Verizon Communications faces in financing its generous dividend beyond next year. Verizon has relied on financial maneuvers to fund the payout, $5.3 billion in 2009. While Verizon reported free cash flow of $14.5 billion in 2009, all of it came from its 55%-owned wireless business. Verizon's reported wireless free cash flow was $14.8 billion, implying its fully owned operations -- predominantly its "wire line" phone business -- generated no free cash flow. Because of its partial ownership, Verizon can't simply tap its wireless business at will. And if the wireless operation pays a dividend, nearly half ends up in the pocket of Verizon's 45% wireless partner, Vodafone Group. Instead, Verizon has lately taken cash out of wireless through repayments of internal loans. But the last $5 billion of those loans will be repaid this year. The easiest option for Verizon, and one that would probably please Vodafone, would be for Verizon Wireless to pay a dividend. The problem is that paying out a big chunk of cash to Vodafone would spotlight that Verizon doesn't have full claim on Wireless's profits. It may also make clear that the pool of cash Verizon can use to pay its own dividend isn't as deep as some investors might have believed.