By Renee Ann Butler
When it comes to domestic telecom stocks, the opportunity for dividends is huge. Big players such as AT&T (NYSE:T) and Verizon (NYSE:VZ) offer dividend yields of roughly 5% (5.22% and 4.83% respectively, to be exact) while smaller telecoms offer even greater dividends. But, in order to realize the full benefit investors have to look at more than just the dividend yield.
Sometimes the stock with the highest dividend yield could actually be the ugliest pick, such as in the case of Frontier Communications (NASDAQ:FTR). This company pays a dividend of 11.43% but its earnings have fallen by an average of over 28% annually over the past five years and its share price is down over 30% year to date. Frontier's dividend is paid quarterly on a payout ratio of 333%.
Part of the reason Frontier's share price is so low right now is that it recently cut its dividend. The company has also been cutting its work force. However, the benefits of these moves are not readily seen in the company's metrics thanks to elevated promotional costs and the loss of higher margin revenue. Further, Frontier has certain Verizon FIOS assets it needs to integrate while working to maintain its existing customer base. Louis Bacon Moore's Moore Global Investments and Richard Schimel's Diamondback Capital both recently sold out of their respective positions in Frontier. I don't see things getting better with Frontier anytime in the near future.
But, Frontier isn't nearly as bad as Windstream Corporation (NASDAQ:WIN). This company's earnings have declined at an average yearly rate of over 20% a year over the past five years, but unlike Frontier, which is expected to have a positive average earnings growth rate over the next five years, Windstream's earnings are expected to continue to fall. Windstream does pay a 10.54% dividend yield but it has already lost almost twice that percentage year to date. The company pays its dividend quarterly and has a payout ratio of 263%.
Windstream is gaining some steam from its PAETEC acquisition and a variety of cost synergies from its more recent deals, but it has also upped its spending, sinking more in supporting broadband and other initiatives it has in place. The company has been actively trying to reduce its debt, which should translate into lower interest costs, but its spending is expected to be 35% higher in 2012. Richard Schimel's Diamondback Capital sold its position in Windstream recently, as did Blue Mountain Capital and Artis Capital Management. I have to agree. Windstream may be a hold or even a buy in some books but there are just simply better stocks out there.
In the domestic telecom sector, I like CenturyLink (NYSE:CTL). It pays a 7.45% dividend yield and, while its earnings have shrank roughly 19% a year over the past five years, analysts are expecting the company will be able to boost its earnings by an average rate of 7.29% a year over the next five years. Also, unlike Frontier and Windstream, CenturyLink's share price has been on an upward trend year to date, returning 6.63% since the beginning of the year. CenturyLink pays its dividend quarterly on a payout ratio of 319%.
Things are looking great for this company. It has its recent acquisitions of Qwest Communications and Savvis. There are some risks - after all, CenturyLink has increased in size considerably over a short period and has to try to pull it all together in a weak economy, but its free cash flow should easily support its dividends and there is a variety of cost synergies that are sure to come from the expansion. Soros Fund Management sold out of its stake in the company during the fourth quarter, when the stock ranged from $31.16 to $38.01, but I think that was premature. CenturyLink hit a high of $40.54 a share during the first quarter, and it looks like there is still room for this stock to run.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.