By Fani Kelesidou
The telecommunication stocks are among the best options for income-oriented investors. Historical data reveals that the sector as a whole has substantially rewarded shareholders by offering spicy dividends. During the last 20 years, the telecommunications services industry had an average trailing dividend yield of 4.79 percent.
At the moment, some of the industry's major players are facing difficulties due to the tight economic environment. In addition, weather-related conditions have imposed serious challenges to U.S.-based carriers. However, most telecom companies already have a large cash stock that is more than enough to cover the current dividends.
Here, I screened for telecommunications companies with a minimum market capitalization of $2 billion and a minimum dividend yield of 5 percent. Data is derived from ycharts and morningstar. While there are several U.S.-based telecommunication companies listed in NYSE, only the following ones fit the above criteria:
CenturyLink, Inc. (CTL)
With a market cap of $23.6 billion, Century Link is among the largest phone companies in the U.S. The company provides local phone services to about 15 million subscribers and Internet access to more than 5 million customers.
A major risk associated with investing in a phone company is that its primary business does not have much room for growth. However, CenturyLink offers a diverse product and service portfolio, which allows us to be optimistic about its profitability prospects. With the acquisition of Embarq, Qwest and Savvis, the company reorganized its business profile and diversified its revenue stream.
During the third quarter of 2012, CenturyLink has achieved solid returns.The company generated free cash flows of $905 million. Operating cash flow margin stood at 41.5 percent. The company's latest cash distribution of $0.725 indicates a yield of 7.66 percent. Currently, the stock is priced at around $40 with a P/E ratio of 45.10. While the current P/E ratio suggests that CenturyLink is quite expensive, the forward P/E ratio of 15.09 is considerably attractive. According to analysts' average mean target price, the stock has upside potential of at least 11 percent. Overall, I strongly believe that CenturyLink's juicy dividends and significant cash flows make it a compelling investment.
Frontier Communications Corporation (FTR)
Based in the U.S., Frontier Communications offers internet, phone line, TV and bundles services to customers across 27 states. The company tripled its size after acquiring approximately 4.8 million access lines from Verizon (VZ). This acquisition offered Frontier significant revenue opportunities.
Frontier applied an aggressive growth strategy through acquisitions, which led to a significant dividend cut. While dividend cuts were painful for shareholders, they were necessary for the company's financial health. Frontier's earnings were negatively impacted by integration and restructuring costs. However, the firm is on the right track for long-term financial stability.
Q3 2012 financial results reflect an overall decent outlook. The company reported operating cash flow margin of 46 percent and free cash flow of more than $215 million. The balance sheet shows an almost $609 million differential between current assets and current liabilities, which means that cash distributions are sustainable. Despite the dividend cut last June, Frontier still offers an impressive yield of 9 percent. At the moment, the stock is trading at around $4.40. Over the last 6 months, the stock performed nicely by returning more than 34 percent.
AT&T Inc. (T)
AT&T is a leading worldwide provider of communications services. The company operates one of the largest 4G networks in the U.S., as well as the nation's largest Wi-Fi networks. AT&T has about 30.000 Wi-Fi Hot Spots spread around the country and provides access to over 220,000 Hot Spots globally.
Over the past five years, the company has rewarded its shareholders with an average dividend yield of 5.49 percent. At the moment, the company offers a yield of 5.12 percent. Moreover, throughout 2012 the stock has followed an upward pace by returning more than 13 percent. For the third quarter of 2012, the firm's consolidated revenue remained overall flat compared with the same period in 2011. Nevertheless, AT&T achieved free cash flow of $6.5 billion, which was a record for the company. Also, it increased its free cash flow guidance to $18 billion, up by $2 billion from its previous outlook. The company's cash generating ability and its comparably low debt-to-equity ratio are enough to secure dividend payments.
Increased competition from major rivals has caused some skepticism over the company's future prospects. Over the past three years revenue growth has been flat for AT&T. However, the company has adopted an expansion strategy that will enhance its profitability and backlog in the long term. The stock is priced at around $33.40. Out of 11 analysts tracked by Morningstar, 7 indicate a "hold" rating while 4 suggest a "buy" rating.
Windstream Corporation (WIN)
Windstream has formed as result of the merger between Alltel and VALOR Communications Group in 2006. The company is a competitive provider of advanced communication and technology solutions, including cloud computing. It serves business and residential customers in the U.S. though a network of more than 20 data centers.
For the first nine months of 2012, Windstream achieved $669 million in adjusted free cash flow. It paid out $441 million in dividends, representing a dividend payout ratio of 66 percent. Windstream offers the highest dividend yield from all the above companies. Its last cash distribution indicates a yield of 11.73 percent. Over the past two years, Windstream performed a series of acquisitions, which added new capabilities to the company's operations. The company completed a restructuring process, which generated approximately $40 million in annualized savings and strengthened its financial position. Currently, WIN is trading at around $8.50 and has about 25 percent upside potential based on analysts' mean target price.