Telecom companies are among my favorite dividend stocks. Given the increasing demand for their services, those companies have been stable profit makers. Surely, the financial crises also affected the telecom industry. Many companies had to cut their spending, and experienced revenue declines, as customers postponed new communication equipment purchases and service upgrades. On top of that, decline in readily available credit inhibited new investments. However, income inelastic telecom services like internet, GSM, home telephone services saved the telecom companies during the recession. Today's figures show that the sector growth has returned to its pre-crisis level.
Telecommunication companies are the cash cows of the market. The profits and regular cash flows are appetizing. Becoming a telecommunication provider requires significant amount of initial capital. Given the dominant market position of incumbent companies, it is almost impossible for new companies to enter this sector. Consequently, we observe an oligopolistic structure, where few companies dominate the industry. Most companies in this sector share their profits with the shareholders by means of nifty dividends. Here is a brief analysis of 5 high-dividend U.S.-based telecom service providers:
- Yield: 5.95%
- Year-to-Date Return: -0.95%
With a market cap of $175 billion as of February 2, AT&T is one of the largest telecommunication service providers in the world. AT&T is an immensely profitable company with a gross margin of 50%. However, due to the write-offs regarding the T-Mobile break-up fees, and the cost of acquiring Qualcomm's (NASDAQ:QCOM) spectrum, its net profit margin falls to single digit levels.
Looking at the graph above, one can easily observe that $30-$31 range is a strong resistance level. AT&T tested this level several times in the past, but the stock could not go above $31. Given the relatively higher trailing P/E ratio, I highly doubt that the stock will pass this resistance in this year. Nevertheless, the yield of 5.95% offers a strong income for dividend-oriented investors. I would not buy AT&T for big profits, but it could be a good hold for the dividend.
- Yield: 5.3%
- Year-to-Date Return:-4.5%
Verizon offers a yield of 5.3% which is slightly lower than that of AT&T. The company was able to increase its quarterly dividends to 50 cents per share. Thus every single share of Verizon comes with a dividend of $2 per year. This yield, combined with possible capital appreciation is surely higher most of the bonds.
Unlike AT&T, Verizon is trading above a strong support level. The stock did not perform well in 2012, but I think this year, shareholders will enjoy both a strong dividend and significant capital gains. Mizuho financial has a target price of $44, implying almost 20% upside potential in intermediate term. At a price of $38, Verizon is trading near the lower-end of my fair value range. Therefore, I rate it as a buy.
Century Link (NYSE:CTL)
- Year-to-Date Return:0.8%
Century Link offers a yield of 7.73% with a pretty high payout ratio of 223%. It has a market cap of $23.1 billion. Century Link operates as an integrated telecommunications company. The company has acquired Embarq and Qwest in 2009 and 2010, becoming the third largest telecommunication company in the U.S.
The payout ratio of above 200% is a strong red flag for dividend oriented investors. Another red flag is the relatively high debt/equity ratio of 1.01. Its P/FCF ratio of 25 also looks relatively expensive. Nevertheless, analysts are pretty bullish on the company. The forward P/E ratio of 14.5 looks like a highly bullish estimate. CenturyLink will report its earnings on February 15. I think this is one stock to watch for big moves, before and after the earnings.
Frontier Communications (NASDAQ:FTR)
- Yield: 17.7%
- Year-to-Date Return: - 17.7%
Frontier offers a double-digit yield of 17.7% which is not supported by the company's earnings. Its payout ratio of 500% is well above the sustainable level. Another reason for the double-digit yield is the reduction in stock price. Frontier lost almost half of its market cap in the last 12 months.
Approximately 7.5% of the shares in float are shorted by the short-sellers. Given the high amount of depreciation and amortization expenses in the balance sheet, it would be a good idea to look at Frontier's cash flow statement. The company generated a net cash flow $1.6 billion from its operations. $921 million is used for investment activities (capital expenditure). The free cash flow generated by the company amounts to $662 million. The company paid dividends that amount to $746 million, which is slightly above the free cash flow generated by the company. Insiders are also bullish about the company, making several purchases worth millions of dollars. I think Frontier is ready for a big bounce in 2012.
Windstream Corporation (NASDAQ:WIN)
- Yield: 8.18%
- Year-to-Date Return: 4.1%
Windstream Communications provides high-speed broadband Internet, phone service and Digital TV packages. The company's costumer portfolio includes residential customers as well as small, medium and large businesses and government agencies. The market capital of Windstream is $6.31 billion, and P/E ratio is 24. Last year's dividend yield was 7.76%, with a payout ratio of 200%.
Similar to Frontier, one needs to explore the company's cash flow statement to figure out sustainability of dividends. In the last year, Windstream created a cash flow of $1.3 billion from its operations. $652 million is used for capital replacement. Windstream generated a free cash flow of $679 million in the last year. It paid dividends worth $502 million. Thus, the yield is more than fully covered by the free cash flow. Insiders are also bullish about the company, making several purchases over the last year. While the debt/equity ratio of 8.92 is extremely high with my standards, Windstream could be a good speculative play.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.