A Look at the Dividends of 3 Telecom Stocks

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This article will take a look at three companies in the telecom sector. Recent dividend cuts by these companies will be presented. It will also analyze whether or not they can maintain and eventually grow their dividends. Furthermore, it will present a case that these companies have shown a recent history of cutting dividends and a weak ability to maintain their dividends compared to the leaders in the sector.

The three companies that will be discussed are Frontier Communications (NASDAQ: FTR), Windstream (NASDAQ: WIN), and CenturyLink (NYSE: CTL).

Dreaded dividend cuts

I was a shareholder of Frontier Communications in early 2012, and had a large position of shares relative to my portfolio at the time. My cost basis in those shares was about $7 per share. Its dividend for the quarter of March 2012 was cut from $0.188 per share to $0.10 per share.

A few days prior to cutting the dividend, Frontier's CEO reiterated that the dividend was safe. When the dividend cut was subsequently announced, it completely decimated my faith in the company. It was not completely unexpected, as the company's revenue was suffering due to losses in land-line subscribers.

Frontier stated when it cut the dividend that it would put the company in a stronger financial position. For a shareholder like me at the time, it essentially guaranteed that the stock was not going to go back up to $7 anytime soon. It seemed much more likely to me that the dividend cut was as a result of deteriorating financial results rather than savvy financial planning.

CenturyLink slashed its dividend for the quarter of March 2013. It was a steep cut that sent its shares stumbling.  It has leveled out since at around $35 per share, and it has a dividend yield fairly close to what it had before the dividend was cut.

The reasoning for CenturyLink's dividend cut was more believable to me, as it was to put the money to use in buying back shares and paying down debt. The company is still expected to grow its earnings this year and next year, and is clearly profitable. That lends more confidence to me that this company is still a good investment for the long term despite the fact that I would not put new money into it at this time.

Windstream, on the other hand, has maintained its $0.25 per-share quarterly dividend since 2006. It is the only company out of these three to not have recently cut its dividend. Despite this, it is clear that none of these companies have increased their dividends either, and a dividend-growth investor might feel much better in the industry leaders such as Verizon and AT&T for this reason.

Frontier Communications - What to do

The question that current or prospective investors should ask themselves when pondering investments in Frontier is whether or not the company can maintain its dividend and rise in price from here. In recent years, including last year to now, the company has been flat to negative in share price. The only returns seen have been from its dividend, and even with that, its performance has lagged the likes of Verizon.

I originally was drawn to Frontier's stock because it acquired the land-line assets of Verizon. Its expertise in rural land lines was supposed to put it in a strong position to profit from these assets. So far, that has proven to be wishful thinking.

The company is expected to earn $0.22 per share this year, down from $0.26 last year. Next year, it is only expected to earn another $0.22 per share. Its dividends are based on free cash flow, and a further deterioration of revenue could eventually make its current dividend yield unsustainable.

In the quarter that ended in March 2013, it had $170 million of free cash flow to pay out $100 million in dividends. So far, it can afford its dividend. An earnings miss in coming quarters though could put it in a precarious position.

Windstream's dividend

Windstream has paid out dividends in excess of free cash flow in two of the previous three quarters reported. Earnings are expected to come in this year at $0.41 per share, down from $0.48 per share last year. Next year, earnings are expected to be $0.50 per share. It will need this growth in order to maintain its dividend, as $73 million in cash (its balance sheet amount as of March) cannot afford a dividend payment.

CenturyLink - Strongest of the three

CenturyLink has easily covered its dividend payments based on its cash flow in the previous four quarters reported. It only has $476 million in cash on its most recent balance sheet though, so earnings will have to come in as expected in order for it to maintain its dividends comfortably. With its strong free cash flow, it has a bit more wiggle room.

Conclusion

I do not view these companies as great investments at this point for purposes of new money. I much prefer investing in the large tobacco companies or the larger telecoms to cash in on the dividend growth.

Over the past year, it has paid to be in the larger names. I see that as a trend that will continue and would only consider adding to my position in CenturyLink if it were to fall in price significantly from here.

When it comes to dividend yields, you won't find many higher than Frontier Communications. While its juicy dividend is tempting, every Frontier investor has to understand that it's not a sure thing. A huge acquisition has transformed the company forever. Will the move bear fruit, or are investors destined for another disappointing dividend cut? In this premium research report on Frontier Communications, we walk you through all of the key opportunities and threats facing the company.


Anthony Parsons owns shares of CenturyLink. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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