Dividends In Danger? Frontier, CenturyLink, Conoco Phillips, 3 Others Continue To Attract Comments

by: David Van Knapp
This is the sixth installment in a series that collects and summarizes SA members’ opinions about companies whose dividends may be in danger. Readers’ comments have been integrated and edited. References to “me,” “my,” or “I” refer to the commenters, not to the author. If you wish to see the full comment stream, consult last month’s article.
Frontier Communications (NYSE:FTR)
Background: In September, the company announced its 5th consecutive dividend at $0.1875/share. The dividend had been dropped to that amount last September, after the company had maintained its previous dividend of $0.25/share unchanged for the previous four years. In 2009, the company acquired wirelines from Verizon (NYSE:VZ) that tripled the company’s size, and FTR has been integrating those operations ever since. The company is on record saying that its plan is to hold the dividend steady for two years while it fully integrates the acquired wirelines, then begin raising the dividend again, presumably in 2012-2013.
The comments on Frontier seemed to converge on a consensus that its dividend is not in danger. Two commenters noted that management stands behind its yearly guidance:
  • At their most recent investor update, FTR’s management indicated that "…future free cash flow dividend coverage should be positively impacted by further synergies, revenue traction, and completion of broadband expansion in 2013."
  • The Verizon integration appears to be proceeding quite well, and therefore it appears that future cash flow should protect the recently reduced dividend.
In an August 8 article, “Frontier Communications Delivering on Cost Savings: Buy It on Sale,” author Crunching Numbers similarly concluded, “As they continue to deliver on these promises, it makes me feel more secure in the safety and sustainability of the dividend as well as my investment in Frontier.”
One commenter noted that he owns both FTR and CTL (see next stock below), but he does not consider either of them to be dividend growers in the core sense, so he has them in a section of his portfolio for high-yield stocks where he does not consider dividend growth to be as important. “Freezes are ok for me on these, but an outright cut would lead me to sell.” Another commenter stated that he sold his FTR some time ago in anticipation of a possible dividend cut.
CenturyLink (NYSE:CTL)
Background: CTL’s 37-year streak of dividend increases is on something of a death watch, as it has maintained but not raised its dividend since March, 2010. In 2008, when CTL's board boosted the quarterly dividend by more than 10x, it stated its intention to pay out "essentially all" of its FCF to shareholders rather than basing its payout ratio on earnings per share. The company then went six quarters before raising the dividend, but then it did so and kept its Champion streak intact for 2010. There are still three months for CTL to raise its dividend in 2011 and thereby increase its streak to 38 years. If it follows its normal schedule, CTL’s next dividend declaration (and final one of the year) will come at the end of November, payable in early December.
As with Frontier, CTL is in the process of digesting an acquisition, this one of Qwest. Comments included:
  • The acquisition doubled CTL's size, just as the acquisition of Embarq had before it, and expansion through acquisition seems to be management’s goal.
  • Based on CTL's recent earnings conference call, the chance of a cut seems tiny. However, CTL issued a boatload of new shares last quarter. So based on the new share count, the dividend looks like it's running over $1.7B, which already puts it at more than 50% of management’s estimate of $3B in FCF. So while I don't see the cut danger, I don't see much room for an increase either.
  • The increase in share count coincided with the closing of the Qwest acquisition.
  • The Qwest merger has the potential to actually increase cash flow generation. Therefore I continue to believe the current dividend is protected, but I still don't see a lot of growth overall.
  • Without acquisitions, CTL does seem like a slow grower, almost a pure income play. The other CTL metric I don’t like is the ROE, about 5% or so; contrast that with VZ and AT&T (NYSE:T), whose ROEs run about 16% to 19% or so. With a such a low ROE, CTL probably can’t grow much except via acquisitions, borrowing, share offerings, etc. Their acquisition integration needs to stay on track because there doesn’t seem to be much of a growth engine without that.
Conoco Phillips (NYSE:COP)
Background: In early July, dividend stalwart Conoco Phillips announced plans to separate its refining and production businesses into two stand-alone, publicly traded corporations. In a conference with analysts in early September, the company stated that the new downstream company will pay a dividend of $0.80 per share, while the remaining upstream company will maintain the current $2.64 per share dividend. As a result, the two companies likely will offer some of the highest yields in their respective peer groups. Both companies will target 5% annual dividend growth. The separation of the companies is expected to occur in the second quarter of 2012.
Comments included:
  • I don't believe the COP breakup forms two new companies. Rather, the reputation of the company is like an asset of the company and goes with each of the "children." The children then form their own reputation as time passes.
  • I still believe the cash flows are there, but like others I need to see some time pass after the split. Nevertheless, I feel the overall income generation via dividends or a combination from both companies remain intact, and could possibly mean that the parts pay dividends greater than the original whole.
  • COP is in my dividend growth area, and I'm in the "wait and see" mindset to see what shakes out. If neither of the new companies both keep and raise the existing dividend, they'll be dropped and replaced, probably with CVX.
Meridien Bioscience (NASDAQ:VIVO)
Background: Meridien’s earnings did not cover the dividend last year and are running close to not covering this year. Meridien has publicly announced a policy of setting a payout ratio of between 75% and 85% of each fiscal year's expected net earnings (see press release.) Meridien Bioscience is a 19-year dividend raiser, but its last increase was in February of 2010. Its current projected yield is 4.7%.
Comments included:
  • VIVO takes great pride in their outstanding dividend growth record, but they are slipping. Dividend boosts are based on management's estimated earnings for each coming fiscal year. They badly overestimated at the beginning of the year so earnings missed, pushing the payout above their 85% policy ceiling. Management then revised estimates downward, missed again in the latest quarter, then revised downward again. I think it's still too early to say VIVO will cut, but I would not be surprised to see a policy change, which could at least end their streak (and maybe prompt a cut). Estimated earnings aren't making it as a policy framework.
Management has indicated that it would like to keep the payout ratio in the 75% to 85% range. Based on current earnings estimates for the next few years this would indicate a very low growth rate of the "yield on cost" due to the higher current payout ratio for 2011. However, if things go to plan it's at least possible that the dividend could be growing again at double-digit rates after 2012.
Nokia (NYSE:NOK)
Background: Nokia has already cut its dividend, since it pays annually and the 2011 amount was lower than 2010. A steady price decline throughout 2011 has pushed its yield up to 8.4%. The stock did not attract much further commentary last month, and it will be dropped from next month’s article unless significant new commentary appears. There was this single comment:
  • NOK still faces headwinds, but after their recent dividend cuts and some improvement in cash flows, the current dividend could be maintained. However, the company still faces enormous headwinds therefore the risk may be higher than the potential reward.
Old Republic International (NYSE:ORI)
Background: Old Republic is a 30-year dividend raiser, with its most recent increase at 1.5% in March, 2011. Its price has been in steady decline since early 2010, and its projected yield stands at 7.7%. This month’s comments:
  • Since the last article, ORI's mortgage insurance unit has had its eligibility revoked by Fannie (OTCQB:FNMA) and Freddie (OTCQB:FMCC), and is therefore in runoff. One of the reasons it seemingly had its eligibility revoked is it was out of regulator compliance but ORI would not contribute capital. Management claims that under runoff the MI unit should have enough capital on its own to pay all claims, but based on my analysis I think it is unlikely. Thus, with ORI, the sustainability of the dividend is going to come down to whether ORI can successfully exercise its "put option" on the MI unit and refuse to contribute capital to honor claims, or whether they will somehow be compelled to contribute capital.
  • I see a lot of risk in ORI’s deteriorating operating results, but their 30-year dividend streak appears to be a badge of honor to management. Also, there appears to be some slight improvement in the general business prospects going into 2012, but the risk is very high in my opinion.
Fading Out
  • Harsco (NYSE:HSC) attracted no new comments last month, and it will be dropped next month unless further discussion appears.
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About This Series
The goal of this series is to provide a place where SA readers can trade ideas and pool knowledge about dividends that may be in peril. One commenter has called it “a neighborhood watch for dividend cuts!” The first five articles have attracted more than 90,000 views and generated more than 450 comments.
The purpose here is to alert others to stocks that may have dividends in danger for any reason. It’s great when people pool their knowledge and ideas for the benefit of all. In the end, though, it is up to each person to do their own due diligence and make their own decisions.
Thanks for your continued interest, and please comment on companies that you think might have dividends in danger!

Please use the Comments section to discuss the companies mentioned in this article or to nominate other companies for the Dividends in Danger series.
The best comments are focused, factual, specific, and reasoned.

Disclosure: I am long TEF.

Disclaimer: Always perform your own due diligence before making any investment decisions. Not all information for each company has been verified by the author.