We love high dividend stocks. They are generally less volatile, have large margins of safety, and pay you while you wait for the stock price to appreciate. They performed particularly well last year. However, some high dividend stocks could not escape the market correction recently, and have underperformed the benchmark. We believe that some of these stocks are significantly undervalued and offer unusually high dividend yields. This article discusses five telecom stocks.
CenturyLink, Inc. (CTL) is yielding 7.80%. The payout ratio is 0.85. The profitability of the firm includes profit margins of 13.48%, operating margins of 29.25% and a return on equity of 9.92%. The stock has a low beta of 0.75. CenturyLink's management is aggressively focused on growing revenues, earnings and dividend distributions. Recent acquisitions, including Qwest, were made to increase the cash flow, which will continue to support dividends in the future. Being in the telecom services industry CenturyLink is currently considered the leading candidate to buy Sprint Nextel Corp (S). The company has a market cap of $22.72 billion and is trading at a forward price to earnings ratio of 14.32. Adage Capital Management and Louis Bacon's Moore Global Investments also have CenturyLink as one of their larger holdings.
Frontier Communications Corp (FTR) is yielding 17.65% and has a payout ratio of over 4.0. The profitability of the company includes profit margins of 2.88%, operating margins of 19.47%, and a return on equity of 3.15%. The stock has low volatility with a beta factor of .79. Current payout in excess of 400% seems large; however a very large amount of free cash flow easily covers the dividend payments. The stock is trading at a price to earnings ratio of 28.32 and has a market capitalization of $4.23 billion. Furthermore, the incremental CAPEX saving is projected to be near 50%. The company will reduce its CAPEX from 19% of free cash flow to 10%. With dividends at 50% of free cash flow, the company is left with 40% of free cash flow to cater to incremental debt reduction.
AT&T Inc. (T) is yielding 5.98% and has a high payout ratio of .0.86. The profitability of the company includes profit margins of 3.11%, operating margins of 9.57%, and a return equity of 3.84%. The firm has low volatility with a beta factor of 0.62. On a free cash flow basis the payout falls to 0.65. We see the earnings per share for AT&T growing at 1% per annum and the dividends per share growing at 5% per annum over the next 5 years. These numbers highlight how AT&T is able to continue with its current dividend payout. This is mainly due the firm's strength in continuous profit and operating margin growth. Moreover, the company's free-cash-flow-based payout ratio is considerably lower than the measure based on earnings. As a result, dividend growth will likely continue in the future.
Verizon Communications Inc. Com (VZ) is yielding 5.40%. The payout ratio is 2.31. The profitability of the firm includes profit margins of 9.2%, operating margins of 11.62%, and a return on equity of 11.80%. The stock has low volatility with the company currently having a beta factor of 0.57. Despite a decline in net income from 2008 to 2010, revenue has been stable and cash flow growth has been substantial. To put this into perspective, a 5 year average dividend yield of 5.30% along with a payout ratio 94% goes to show the sustainability of the company's current dividend payouts or even a possible increase in the next quarters. With tremendous growth in the smart-phone market, we believe revenue and cash flows for VZ will also continue to grow, making it viable to distribute more cash back to its shareholders.
Windstream Corp. (WIN) is yielding 8.30% and has a payout ratio of 1.92. The profitability of the company includes profit margins of 6.42%, operating margins of 28.79%, and a return on equity of 36.24%. The stock has low volatility with a beta factor of 0.86. Windstream is trading at forward price to earnings ratio of 14. High payouts of dividends are depleting cash, while the interest expense to fund financing is eating up more than half of the company's earnings. Therefore Windstream will continue to borrow to support its dividend payments. High debt loads and high interest expenses will limit its ability to increase its dividend payments substantially.