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By Kathleen Fitzpatrick

Chasing after dividend yields, investors often turn a blind eye to red flags raised by a company’s debt and how it can impinge on future growth. Two telecom equities often touted for their high dividend payouts – CenturyLink, Inc. (NYSE:CTL) and Frontier (NASDAQ:FTR) -- also carry baggage that should give investors pause before jumping into the stocks.

CenturyLink is the third largest telecom provider in the U.S. behind Verizon (NYSE:VZ) and AT&T (NYSE:T).

The company completed a huge expansion of its customer base in 2011 by acquiring its closest competitor, Qwest Communications, along with some other smaller competitors. The company provides a wide range of data, voice and managed services to businesses, wholesale customers and government.

The acquisition of Qwest doubled CenturyLink’s customer base and boosted earnings in the company’s latest quarterly report, which shows the company’s quarterly revenue growth up a whopping 162 percent.

The company appears to be on a future growth trajectory. It is focusing on expanding its broadband services, fiber to towers and residential neighborhoods, hosting, cloud and TV services. In Dec. 2011, the company completed a five-year $250 million deal to provide private line services to all DOD agencies, including the Air Force, Army, Marines and Navy.

Its partnership with Verizon to provide wireless services to CenturyLink customers offers the assurances of quality wireless communications from the nation’s largest provider, linking CenturyLink to the leading wireless brand in the nation.

The balance sheet for Dec. 31, 2010 shows total assets of $22+ billion with liabilities of $12+ billion. Of those total assets, nearly half are categorized as goodwill and intangible – vague and ambiguous at best. The 2011 acquisitions for future growth will no doubt increase operating costs and company debt in the near term.

CenturyLink, a recent George Soros favorite, currently trades at a 24.57 PE which is high compared to industry leaders Verizon (PE 15) and AT&T (15.34 PE). Analysts put its PEG ration at 1.31 at the end of 2011, and then adjusted to 2.29 for March 2012, indicating future earnings growth is already cooked into the current stock price. Analysts estimates for 2012 and 2013 have earnings falling in the negative -- just over one percent down -- compared to 2011. The stocks gets an overall buy recommendation of 1.9 on a scaled rating where 5 is a sell. The most recent dividend of $2.90 per share yields 7.9 percent, higher than both Verizon (5%) and AT&T (5.8%). The 2010 balance sheet show cash per share at $1.82 and current earnings per share are estimated to be $1.51 – not a good portend for the $2.90 dividend.

CenturyLink’s stock followed a downward trend from its high of $46.68 in January . Its low of 31.16 occurred during the volatile month of August and the stock has been trending upward since then. All told, it’s down about 19 percent from its 52-week high, so the 7.9% yield was of little comfort to investors in 2011.

Frontier Communications Corporation offers voice, high-speed Internet, satellite video, wireless Internet data access, data security solutions, bundled offerings, specialized bundles for small businesses and home offices, and advanced business communications for medium and large businesses in 27 states, and is a leading provider in rural areas.

Frontier presents similar danger signals regarding its dividend, currently yielding 14.6 percent at .75 cents per share. With EPS at .16 cents per share, and cash per share at .21 cents, the dividend looks unsustainable despite executive management’s declaration to stay committed to this payout. Like CenturyLink, Frontier also attributed nearly half its total assets in 2010 as goodwill and intangible -- hard to decipher the real worth.

Third quarter earnings report paint a negative picture. Revenue was $1.29 billion as compared to $1.3 billion in the second quarter of 2011 and $1.4 billion in the third quarter of 2010. The decrease in revenue for the third quarter of 2011 as compared to the third quarter of 2010 is attributable to decreases in the number of residential and business customers, switched access, video and directory revenue. The company recently signed a $575 million loan agreement that will be used to retire existing debt.

On the plus side, Frontier is partnering with AT&T to provided wireless services to customers, also associating its name with a respected telecom brand.

The stock has been in steady decline through 2011 from its high of 9.84 January 2011 to 5.30 at the end of the year. Even the high dividend yield of 14.6 percent cannot compensate for a capital decline of 46 percent.

Frontier’s 33.11 PE is even higher than CenturyLink’s and far above the industry average and those of industry leaders Verizon and AT&T. Statistics such as these do not create serenity in an investor’s mind, despite the dividend. Buying the stock for its dividend looks risky at best.

Source: CenturyLink Vs. Frontier: Which One Is Great For Dividend Income?