Not unlike electric and water utility companies, telecommunication companies, particularly those with large wireline businesses, tend to offer above average dividends. The downside is that with the rise of wireless and internet phone services, wireline is a declining technology. I am going to take a closer look at six high yielding communications companies to see if they have a place in an income retirement portfolio. Some, like AT&T, Inc. (T) and BCE, Inc (BCE) have large, wireless operations. Others, like Centurylink, Inc. (CTL), Frontier Communications Corp. (FTR), and Windstream Corp. (WIN) have bet on mergers and acquisitions to broaden their offerings. I have also included Consolidated Communications Holdings, Inc. (CNSL) both because of its dividend yield, and because I wanted to see how lack of scale might impact a smaller company.
This chart gives a snapshot of the current values and trends for the companies' dividends, and the profits and cash flows that support them.
Ticker | $ Price; P/E | Market cap ($ billions) | 3rd quarter 2011 dividend annualized; yield % | 3rd quarter 2011 earnings $ per share | 12 month $ free cash flow / share | Long term debt / capital % | 5 year cumulative dividend growth % |
FTR | 5.00; 31.1 | 4.9 | $3.00; 15 | 0.02 | 1.65 | 61.5 | -25 |
T | 29.30; 14.9 | 173.7 | $1.72; 6.0 | 0.61 | 5.7 | 33 | 21.2 |
CTL | 26.60; 24.1 | 22.6 | $2.90; 8.3 | 0.34 | 9.2 | 47.5 | 1000.00% |
WIN | 11.83; 23.1 | 6.1 | $1.00; 8.7 | 0.14 | 2.3 | 91 | 0 |
CNSL | 19.33; 23 | 0.58 | $1.55; 8.2 | 0.61 | 3.85 | 94 | 0 |
BCE | 40.18; 15 | 31.3 | $2.01; 5.1 | 0.83 | 7.3 | 46 | 43 |
Frontier (FTR)
Frontier restructured itself by purchasing nearly 5 million access lines from Verizon Communications, Inc. (VZ) for $8.5 billion in cash and stock. Frontier believes it will be able to squeeze up to $600 million in annual savings once it has fully digested the near tripling of the company.
At present, Frontier's generous dividend is not covered either by its earnings or by is free cash flow. That cash flow should be increasing as synergies are created, and management is committed to maintaining the dividend at current levels. If the proposed synergies do not fall into place as quickly as management expects, the company cannot afford to pay this dividend indefinitely. This low priced stock is the most speculative of the companies listed here, and is not for the risk adverse.
AT&T (T)
AT&T is among the world's largest non government telecommunications companies. Its dividend has risen modestly each year since the “new” AT&T was created in 2005. It recently failed in its pursuit of T-Mobile, but with AT&T's ample cash flows, its well covered dividend, and modest debt levels, it has ample flexibility to pursue other avenues to beef up its spectrum in order to better compete with its nemesis, Verizon Wireless. AT&T is well behind Verizon's pace in rolling out 4th generation, long term evolution (4G LTE) service in the United States, and AT&T’s capital spending has been hovering around $20 billion per year in its attempt to improve its service.
I like AT&T as a solid income and value play. It may not surprise anyone, but that is a good thing for much of the population.
Centurylink (CTL)
Centurylink radically transformed itself with its $12.2 billion purchase of its larger rival, Qwest Communications, in April, 2011. The deal more than doubled Century's customer base, and launched it into new business and government markets. Between that deal, and the far smaller purchase of Savvis, Centurylink will create a broad enterprise and cloud hosting company. That is a far cry from the rural phone company that is Centurylink's heritage.
Centurylink was paying an annual dividend of $0.26 in 2007, $1.54 in 2008, and $2.80 in 2009. After that meteoric ride, given the dilution of the company's share base due to its recent mergers and purchases, dividend growth will likely flatten out. Shares outstanding grew from 100 million in 2008, to over 600 million today. Centurylink expects to save $625 million annually through synergies through the Qwest merger. In the meantime, Centurylink's ample cash flow will support the dividend until profits catch up. There is risk, as there are no guarantee's all those savings will come to pass. But the current yield is compelling. I see Centurylink as a moderately risky income stock.
Windstream (WIN)
Windstream is a traditional wireline phone company that was spun off from cellular company ALLTELL in 2006. ALLTELL, of course, was subsequently acquired by Verizon Wireless. It has paid its $0.25 quarterly dividend consistently since 2007. As the chart shows, while earnings fall short of covering the dividend, cash flow easily covers it, and it is relatively safe for now.
In early December, Windstream closed on its pending $2.3 billion purchase of PAETEC Holding Co. Not only does Windstream expect this to immediately be accretive to cash flow, it also expects by mid decade to have rung out over $100 million per year in operating and capital expenses. The deal also comes with $250 million in tax benefits. Another benefit is it takes Windstream one more step away from reliance on wireline customers only.
Windstream is very debt ridden, and the PAETEC purchase will be dilutive to stock. Despite the relatively safe dividend, there are better choices available.
Consolidated (CNSL)
Consolidated seems to pride itself on its generous dividend, which has remained steady at $1.55 per year since 2006. However, the business itself has not been so steady. Revenues have declined steadily for the past three years, from $418 million in 2008, to an estimated $375 million for the full year 2011.
The company's cash flow is double its dividend, but Consolidated remains firmly committed to the wireline businesses of phone, cable and internet. It has a large debt load, and will not find the means to grow internally. It will be a question of whether Consolidated will be acquired, or the acquirer, as on its own it will inevitably continue to shrink.
Consolidated is a fine choice for short to intermediate term income seekers. Just do not count on its long term future as an independent company.
BCE (BCE)
BCE is the largest communication company in Canada. Just like the American wireline companies, its core business is shrinking. It is combating by shifting to being a cellular provider, and will be rolling out a 4G LTE platform in Toronto in 2012.
BCE's dividend is well covered by its earnings and cash flow, and shows consistent growth. The company is growing, and has a highly manageable debt load. This is an excellent choice for growth and income investors, in my view.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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