Telecom Giant: Verizon’s Dividend Increase Keeps Pace (VZ, T, CTL, FTR, WIN)
Jim Trippon: Telecom giant Verizon Communications (NYSE:VZ) recently raised its quarterly dividend from 50 cents per share to 51.5 cents, for an annual payout of $2.06. This is a 3 percent increase in the dividend, and is the sixth consecutive year for a dividend increase. The current yield on the $2.06 dividend payment will be 4.7 percent, which equals the yield of its major telecom rival AT & T (NYSE:T). AT & T increased its dividend last December, yet some investors were disappointed in the small increases by the two companies.
Verizon, AT & T, S & P 500 5 Year Chart
The dividend hike by Verizon is a small step to continue to keep pace with AT & T, as these two companies often mirror each other in their dividend strategies. Investors have a long history of favoring telecoms as dividend stocks, going back decades to the sleepier days of investing. While not strictly widow and orphan stocks anymore, as telecom has become a much more volatile industry with all the rapid technological changes, these two stocks remain bellwether dividend stocks. How much do investors rely on these dividend payments? Last year, Verizon paid out $5.6 billion in dividends, while AT & T paid out more than $10 billion.
Verizon and AT & T are considered conservative dividend stocks, which isnâ€™t a bad thing at all when you look at the yields. With yields pushing five percent in todayâ€™s low interest rate environment, particularly with stocks of a couple of companies that arenâ€™t likely to disappear anytime soon, you have a pretty decent investment. Other telecoms are also noted as good dividend payers. The regional players, smaller names with sometimes slightly less stable businesses, such as regional telecom Century Link (NYSE:CTL), yields 6.9 percent. Windstream (NYSE:WIN) currently pays a dividend that yields 9.9 percent, a yield which recently briefly reached more than 10 percent. Then thereâ€™s Frontier Communications (NYSE:FTR), which yields 8.6 percent. So whatâ€™s the catch with these stocks? Why wouldnâ€™t investors choose them over the more staid, lower yielding big two of Verizon and AT & T? Safety of the dividends. Risk.
Risky Business, Risky Dividends
Frontier Communications had a dividend cut followed by a share price drop, and some analysts are extremely cautious on Windstream. Windstream has invested heavily in both capital expenditure and is attempting to integrate some acquisitions, but its near term income growth prospects are not attractive. Analysts have forecast negative growth for Windstream. The company also has seen its free cash flow diminish in the last couple of years, from $762 million in the second quarter of 2010 to $604 million in this yearâ€™s second quarter. The stock also trades at a relatively high multiple of just under 35, while Frontierâ€™s current PE is 45.
A Difficult Industry
Telecom is still a capital intensive industry, and with the rapid changes in technology, such as fiber optics, broadband, and wireless, companies have had to scramble to pay up to get in or stay in the game. Also, thereâ€™s been considerable capital investment previously in now depreciating landlines, a business thatâ€™s shifting from a legacy one to a potential albatross, as landlines are an area of diminishing revenues and may one day be simply a vestigial part of the telecom industry.
Furthermore, telecom stocks used to have high dividend payout ratios but were able to cover their payouts with earnings. No more. Verizonâ€™s payout ratio is edging close to 200 percent, while AT & Tâ€™s is even higher, at 235 percent. The regional players sport even more striking payout ratios, with Frontier at 523 percent, CenturyLink at 354 percent, and Windstream at 333 percent. The metric most often used now by the companies to point toward dividend coverage or safety is cash flow, which is fine in context. But as has been pointed out, in addition to high cap ex costs in the industry, there is depreciation, which in some industries is more of a technical accounting matter than it may be in telecom. Equipment needs to be replaced. So free cash flow rather than operating cash flow might give a better indication of margin of safety, or lack of one. Verizon, for example, has roughly $30 billion in operating cash flow, with levered free cash flow at more than $11 billion, but the smaller players have a tighter window on this.
CenturyLink, Windstream, Frontier, S & P 500 5 Year Chart
Investors should check carefully into the financial numbers of the telecoms before buying the stocks for dividends. The days of telecoms simply providing an endless stream of reliable cash to investors without much attention focused on the business operations or the industry are, or should be, over. A little extra attention can keep you from making a mistake and help you profit instead.
Jim Trippon, founder ofÂ Trippon Financial Media, Inc., is a maverick that has dedicated his investment career to helping investors make smarter financial and stock selection decisions. Trippon,Â an internationally recognized expert on global andÂ valueÂ investing, has a deep passion for finding hidden value in global equity markets. Trippon started his career as a financial statement examiner with Price Waterhouse which allows him to dissect a public companyâ€™s financialÂ picture and better identify hidden gems. Tripponâ€™s savvy approach toÂ investingÂ and personalÂ financeÂ makes him in high demand by major media who seek his unique perspective on stocks and global economics. He hasÂ been featured in top publications both in the US and abroad includingÂ Bloomberg, Investorâ€™sÂ BusinessÂ Daily,Â TheÂ NewÂ YorkÂ Times, The International Herald Tribune,Â StockÂ FuturesÂ and Options Magazine, The Bull and Bear Financial Report and he regularly appears on broadcast television including as an on air contributor to CNBC, CNN, Fox Business, and Fox News.
This information was brought to you by GlobalProfitsAlert.com, a publication of Trippon Financial Research, Inc.Â GlobalProfitsAlert.comÂ publishes information on Investing in the ChinaÂ stockÂ marketÂ and emerging markets, dividend stock and income investing,Â exchange tradedÂ fundsÂ (ETFs), green energy stocks,Â technologyÂ stocks, global market trends and otherÂ investmentÂ information. To view archives or subscribe, visitÂ www.globalprofitsalert.com.