By: Ahmed Ishtiaq
In the current low-interest rate environment, high-yielding stocks with the potential for dividend growth are worth their weight in gold. The Telecom sector has been one of the highest-yielding sectors over the past two years. At the moment, there are attractive dividend picks in the sector, which can add substantial value to any income portfolio.
On the other hand, the Telecom sector has gone through substantial changes due to a change in technology and acquisitions. It is important that we pick stocks which can maintain or increase their current dividends. In this article, we decided to identify three sector stocks with yields of more than 5% and strong financials to back the dividends.
Frontier Communications (NASDAQ:FTR):
Frontier Communications is the first stock on the list. At the moment, the company offers a dividend yield of 9.20% and is among the highest-yielding stocks in the market. Frontier acquired assets from Verizon Communications (NYSE:VZ); as a result, the company has gone through an integration process. Over the past two years, Frontier suffered due to the integration costs and high levels of debt. As a result, the company had to cut its dividends twice, bringing down its annual dividend to $0.40. However, the company has entered the phase of stabilizing revenue.
Frontier's decision to cut the dividends was surely painful for the shareholders. However, it provided the company financial flexibility necessary for the long-term future of the company. Its capability to generate impressive cash flows should enable the company to maintain its dividends. For the first nine months of 2012, the company has generated $1.16 billion in cash flows from operations. In addition, free cash flows remain strong for the company.
At the moment, Frontier has a cash flow margin of 46.4%. Further, the company has generated free cash flows of $753 million during the first nine months of the year. Over the past twelve months, Frontier has paid $486 million in dividends and generated $725 million in free cash flows. Trailing twelve month payout ratio based on free cash flows comes out to be 67%. In addition, the company has replaced some of its costlier outstanding debt with new cheaper issues. Along with the previous dividend cuts and interest savings, cash flows situation will further improve. We believe that Frontier will be able to maintain its dividends, and can be an important addition to dividend portfolio.
CenturyLink Inc (NYSE:CTL):
CenturyLink Inc is the third major telecommunications company in the United States and is known as a leader in the network services market. It offers an annual dividend of $2.90, yielding 7.69%. The company has one of the juiciest dividend yields in the market, which is a big pull for its investors. Despite slow growth and high churn rates in the industry, the company has been able to record exceptional revenue growth. In addition, cash flows from operations have grown at an exceptional rate for CenturyLink. At the end of 2011, it generated $4.2 billion in cash flows from operations and $1.79 billion in free cash flows. For the trailing twelve months, cash flows from operations and free cash flows stand at $4.98 and $2.05 billion, respectively.
Over the years, the company has grown substantially through acquisitions. An increase in demand for high speed internet will play a key role in the growth of the company. Another major growth driver for the company will be Prism TV. At the moment, CTL has long-term debt of over $19 billion and $1.19 billion maturing in the current year. However, the company should not have any trouble paying the portion of debt due to solid cash flows. Strong growth opportunities and solid cash flows should enable the company to maintain or increase its dividends.
AT&T, Inc (NYSE:T):
AT&T is the largest communications services provider in the United States. Currently, the company offers a dividend yield of 5.40% and an annual dividend of $1.80 per share. AT&T generates mammoth amounts of revenue and has demonstrated impressive growth over the years. In the past twelve months, the company has generated revenue of over $60 billion and operating income of $9.9 billion. Furthermore, AT&T generates massive cash flows. Currently, trailing twelve months cash flows from operations for AT&T stand at $36.44 billion. In addition, the company has TTM free cash flows of $17.2 billion. At the end of 2011, free cash flows stood at $14.5 billion.
It indicates that the company had impressive growth during 2012, and if the growth continues, it will be able to further augment its FCFs. A look at the debt of the company reveals that the first maturity of debt will fall in 2015. However, solid free cash flows and ability to refinance the debt should help the company in payment of its maturing debt. I expect the company to increase its dividends due to solid growth in its free cash flows. AT&T will prove to be a smart addition to the portfolio.
All of the companies mentioned in the article have strong financials and attractive growth opportunities. According to my analysis, these three stocks will be solid additions to the dividend portfolios. Solid free cash flows, ability to service debt and growing revenue will enable these three companies to maintain dividends. Free cash flow is one of the most important metrics for dividend-paying companies. Future growth prospects should enable these companies to provide their investors with an attractive return on investment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ahmed Ishtiaq, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.