During times of economic duress, we have always been able to rely on the dividends from those stocks forming the foundation of our portfolios. With recent events in the market, and investors looking to diversify their risk away and increase yield, we see the American telecoms as an intriguing way to increase your returns via dividends.
AT&T (T) is the largest phone company in the United States and has been either the #1 or #2 mobile franchise in the country over the past decade, as measured by number of customers (trading spots with Verizon (VZ) depending on who conducted the last merger in most cases). Currently the company is moving forward with its acquisition of Deutche Telecom’s T-Mobile Unit in order to gain valuable spectrum in markets where AT&T itself has pushed its network to its limits. The company pays a healthy $1.72/share dividend, which gives investors a healthy 5.7% yield at the current stock price. The company is the top long distance provider in the US and should the T-Mobile deal close, would be the undisputed number one mobile carrier in the US. The company’s shares could pull back if the T-Mobile deal falls through due to antitrust concerns, but long-term the company owns 100% of one of the largest mobile networks in the country and provides an incredibly attractive dividend.
Verizon Communications, Inc.
Verizon (VZ) has what many in the industry believe is the top network. The company has not experienced any of the network overload that AT&T did during the rollout of the iPhone, and still experiences in parts of the country. Verizon only has 55% ownership in Verizon Wireless, a joint venture with the UK’s Vodafone (VOD), but like AT&T has exposure to the triple play in the US home (television, telephone, and internet). The company has rolled out the FiOS platform and investors should see capital expenditures fall going forward. At its current price, Verizon shares yield 5.5% with the current dividend of $1.95/share.
Now that the company has Apple’s (AAPL) iPhone in its offering, along with its stable of Android-based phones, Verizon should see strong subscriber growth moving forward. Investors can also take comfort in that it appears Verizon and Vodafone may be able to agree to distribute dividends from the wireless joint venture, which would help solidify Verizon’s ability to continue upgrading its infrastructure across various segments while maintaining the integrity of its current dividend.
Windstream (WIN) is traditional phone company, which lacks a wireless presence like AT&T and Verizon possess. The company has operations in 23 states, including Florida, Georgia, Texas, Ohio, and Pennsylvania. Windstream was created from the spin-off of Alltel’s landline business in order for that company to form two pure plays for investors and maximize shareholder value. The company has rolled up various landline businesses, but also ventured into the fiber arena and developed a triple-play offering.
Windstream too offers a healthy dividend, currently $1/share, yielding roughly 8.2% at the current share price. The company is deleveraging, and refinancing its debt. It plans on saving more than $90 million alone in interest expense starting in 2012. Strong growth in the data and video segments should help the company weather the loss of landline connections and maintain the healthy dividend.
CenturyLink (CTL) is now the third largest communications company located in the US. It offers a triple play package, and due to the rural service areas it services, deploys Directv in some instances to complete the offering. The company purchased both Embarq and Qwest and is in the process of consolidating them while realizing the economies of scale they promised investors.
What investors are really excited about is the acquisition of Savvis that the company completed. Savvis opens up the hosting and cloud computing segments to CenturyLink and gives it global scale. The company has wisely positioned itself to be a player in the future of telecommunications and Wall Street believes that this could separate the company from its peers. Like its peers, CenturyLink pays a steady $2.90/share dividend which yields a 7.8% yield.
Many in the industry are worried about Frontier’s (FTR) dividend. At $0.75/share and yielding roughly 10%, it does throw up a few red flags due to the high rate, and a simple look at EPS and the dividend payout indicates the company pays out more than it earns. Make no mistake, Frontier does have the dividend with the highest risk of being cut due to its acquisition of Verizon’s rural landline business and the extra debt taken on. Although the company does have sufficient free cash flow to continue paying this rate, we think it is most likely they lower the dividend going forward in order to deleverage the balance sheet, and position the company to maximize shareholder value moving forward.
It lowered the dividend before, following the acquisition of the VZ assets and we could see this happening again to bring the yield in-line with the industry average. Although this would be a setback for the short-term, the company has shown an ability to add subscribers to new services (video and broadband) while managing the subscriber loss on the traditional landline segment.
These stocks all have varying degrees of risk involved due to their legacy businesses, however they are all positioned for future growth. Investors are also being compensated as these companies go through their transformations. With US Treasuries, CDs and bank deposits paying historic lows in interest, investors would be wise to explore the possibilities of bringing in these dividends.