The Good, the OK, and the Ugly of Regional Communications
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There are three different regional communications companies that are competing for service with the communications industry's larger players, such as AT&T and Verizon. These three also have been making a major push into high speed Internet service, which puts them in competiton with companies like Time Warner and Comcast. On the surface the three companies pay large dividend yields and look the same. If we dig a little deeper, you'll see why I call them the good, the OK, and the ugly.
| Name | Price | P/E on '12 earnings | Growth Exp. | Yield | Cash Payout Ratio | Debt-to-Equity Ratio |
| CenturyLink | $37.89 | 14.69 | 9.63% | 7.65% | 61.04% | 0.96 |
| Frontier | $4.89 | 18.81 | 11.40% | 15.34% | 47.59% | 1.71 |
| Windstream | $12.35 | 14.36 | 2.00% | 8.10% | 81.87% | 8.87 |
(The Cash Payout Ratio is Total Cash from Operating Activities divided by the Dividends paid, as reported on Yahoo Finance for each company's most recently quarterly Cash Flow numbers.)
The Good:
CenturyLink (NYSE: CTL) -- If you look at the table CenturyLink has some respectable numbers. They have the second lowest forward P/E with the second highest growth expected. CenturyLink pays out a nice 7.65% dividend and with a cash payout ratio of 61.04%, the dividend is well covered. There are two things that CenturyLink has that neither of its peers can claim. First, a debt-to-equity ratio below 1. This means CenturyLink is financed by more equity than debt, which is a sign of a stronger balance sheet. Second, CenturyLink is the only one of the three to show increasing total assets and equity each of the last four quarters.
The OK:
Frontier Communications (NASDAQ: FTR) -- If Frontier's numbers are sustainable they look to be the best. They pay the highest dividend, have the highest growth rate, and have the lowest cash payout ratio. The question with Frontier comes down to sustainability. There are two things I've noticed with Frontier. First, it's the only one of the three that shows decreasing equity and assets in each of the last four quarters. Second, it's experienced large negative cash flow from investing activities. The decrease in equity and assets is a worry because if this continues the company's earnings power shrinks. If the large negative cash flow from investing activities continues it would compromise the company's ability to pay the dividend as well. While these are longer term problems, the dividend is the main attraction of this company's stock and its importance can't be overstated.
The Ugly:
Windstream Corp. (NASDAQ: WIN) -- Windstream has the most challenges. The company has a good yield and that's about it. Windstream is expected to grow much more slowly than the other two companies. It has a P/E ratio that would suggest higher growth, which could indicate the stock is overvalued. The cash payout ratio is the highest of the three and has been trending higher. Possibly the most disturbing is the debt-to-equity ratio, which is 8.87:1. This means Windstream has almost 9 times more debt then equity. This is the weakest balance sheet by far of these three companies. If Windstream's cash payout ratio keeps climbing, the dividend could be in trouble sooner rather then later. If the dividend gets cut, the stock could lose half or more of its value very quickly. This company without its over 8% dividend doesn't have a lot of growth or balance sheet strength to push the stock forward.
When we compare these three companies side by side you can really see which traits stand out. If you are looking for a high yield stock, these three are a good place to start. Link up with the good, make sure the frontier is really OK, but don't get blown away with the wind.
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