tk77mann

Are High Dividends Sustainable?

Fairpoint had way too much debt and took on a huge acquisition (the wireline business of Maine, NH, and Vermont from Verizon), with all new computer systems required. They could not integrate on time and revenues declined and they were not able to recover.

I look at the Net Debt to EBITDA ratio of stocks to see if their debt loads are too high. For me a ratio of anything less than 4 : 1 in a stable industry is a fairly safe bet. But GD is absolutely correct, you have to watch all of your investments to keep losses to a minimum.

Are High Dividends Sustainable?

Hao,

You are missing the wonderful benefit of depreciation when looking at dividend sustainability of companies like CTL and WIN. In 2008 CTL had a depreciation expense of $523.8M (all of which is a non-cash expense), versus Capital Expenditure spending of $220.3M. Their Free Cash Flow from this difference (~$300M) is more than enough to cover the $220M in dividends they paid out in 2008. And this does not even include their profits for 2008. With their extra cash flow they bought back $332M worth of stock in 2008, a real bargain since they were also reducing the dividends they have to pay in the future.

Some folks might argue the CTLs and WINs of the world might not be able to keep up spending less than they are depreciating. There are two strong factors that will be used to keep their FCF strong. The first is that these are old line companies with assets invested in the 1980's, 1990's, and recently that have still not been depreciated over their 30 year lives. (These are mainly wireline telecom companies.) The second factor is every time they buy another telecom company they get an entire new slug of assets to be depreciated.

In CenturyTel's case, they just bought Embarq. Even though Embarq had depreciated its assets over the decades, these same assets get written back up to the purchase price and now CTL gets to depreciate them again over the next 30 years. And CTL's cash flow goes on and on.

WIN has recently bought two smaller competitors so they are following a similar strategy (with economy of scale efficiencies thrown in, to boot).

So please do not only look at the Dividend Payout Ratio when looking for sustainable dividends. A Dividend Payout Ration based on Free Cash Flow is at least, if not more, as important.

Nine High Yield Telephone Stocks Calling

I think the best of these have cash flows that cover well the dividends and CapEx spending. Some of these companies are borrowing to pay the dividends so unless their revenues increase dramatically (tough because of the business they are in and the recession), it is probably better to be in the ones that are very cash flow positive (EQ, WIN, FTR, etc.)