These two winning investments have solid financial statements to back continual shareholder returns. When I selected these stocks, I focused on the companies’ balance sheets, cash flows, and income statements in order to determine which ones have the best dividends.
AT&T Inc. (NYSE:T) , the first company on the list, offers a quarterly dividend of $0.45 per share. For the full year 2012, it paid a dividend of $1.77 per share. AT&T Inc. (NYSE:T) offers wireless and wireline telecommunications services in the United States and globally.
How the dividends are safe
- Income statement
AT&T Inc. (NYSE:T) has been building solid income statements over the years. At the end of Q1 it displayed strong mobile-data growth, continued strong gains in U-verse services, and solid post-paid net adds. In the past three years, its revenue growth on average has stood at 1.3% compared to an industry average of negative 2.7%. Additionally, AT&T Inc. (NYSE:T) has a solid sales margin; its net margin stands at 5.7% (trailing 12 months) compared to the industry average of 3.5%.
- Balance sheet
AT&T Inc. (NYSE:T)’s financial health is also strong. Over the years AT&T has been consistently improving its liquidity ratios. The company has stable current and quick ratios, standing at 0.7 and approximately 0.5, respectively, at the end of the latest quarter. The company isn’t facing a liquidity crisis at present.
- Cash flow
Cash flow is an essential gauge for any company’s ability to sustain returns and AT&T Inc. (NYSE:T) has the potential to generate strong cash flow. At the end of Q1, its operating cash flow stood at $8.2 billion. In the past three years, AT&T has been able to stretch operating cash flow by $6 billion. Its free cash flow adequately covers dividend payments, and stands at $19.7 billion (ttm), while dividends only account for $10.2 billion.
Another contender
CenturyLink, Inc. (NYSE:CTL) is the third-largest telecommunications company in the United States. The company is a leader in the network-services market and also dominates in cloud infrastructure and hosting IT solutions for enterprise customers. Recently, the company revised its capital allocation strategy, and as a result it reduced its quarterly dividend to $0.54 share.
How the dividends are safe
- Income statement
CenturyLink, Inc. (NYSE:CTL) has a smart investment strategy that drives business growth in key areas of the company, which will stabilize its top-line growth. At the end of 2012, it was able to stretch its revenue from approximately $15.3 billion to about $18.4 billion. At the same time, the company is making improvements in its margins. It has improved its EBT margin from 6.2% to 6.8%.
- Balance sheet
The company’s balance sheet paints quite a different picture than its top-line growth. Its liquidity ratios, particularly its current and quick ratios, have displayed decreasing trends in the past two years. However, after the painful decision to cut dividends, the company is in a strong position to stabilize these ratios. CenturyLink, Inc. (NYSE:CTL) is seeking to utilize a portion of cash flow to repay its debts. The company expects to decrease debt levels in the range of 3 times its EBITDA.
- Cash flow
On the other hand, CenturyLink, Inc. (NYSE:CTL) has the potential to generate strong cash flow. At the end of 2012, it expanded operating cash flow by $1.8 billion. The company’s potential to generate hefty cash flow combined with the fact that its free cash flow covers dividend payments makes me hopeful about its dividend stability.
Third telecom play
Verizon Communications Inc. (NYSE:VZ) , the third company on this list, operates in two segments: Verizon Wireless and a wireline business. At present, the company offers a quarterly dividend of nearly $0.52 per share. For full year 2012, it paid dividends of just under $2.02 per share.
How the dividends are not safe
- Income statement
Verizon Communications Inc. (NYSE:VZ)’s strategic investments in wireline, wireless, and global networks has enabled it to sustain momentum. Since investing in many growth opportunities in key markets, such as broadband, cloud services, and video, the company increased its operating revenue by 4.2% to $29.4 billion at the end of Q1. Verizon Communications Inc. (NYSE:VZ) has a solid sales margin and its operating income increased by 19.8% at the end of Q1.
- Balance sheet
The company’s financial health is not as solid as its income statement alone. Its liquidity ratios are quite risky. At the end of the latest quarter, its current and quick ratios are low at 0.8 and 0.6, respectively. Its debt-to-equity ratio is also high at 1.4, while the industry average stands at only 0.8. Looking at cash flow can reveal more facts about its ability to manage debt and sustain dividends.
- Cash flow
Cash flow has been inconsistent over the past few years. At the end of Q1, its operating cash flow grew by $1.6 billion, or 26.4%, compared to the year-ago quarter. It is also investing in growth opportunities, although capital expenditures remain flat at $3.6 billion year after year. Still, after capex, its free cash flow doesn’t cover its dividend payments. As a result, the company has to borrow additional money for dividend payments or growth activities.
In conclusion
AT&T Inc. (NYSE:T) is a solid pick for dividend investors since the company has strong top-line growth and financial health combined with free cash flow to cover its dividends. CenturyLink, Inc. (NYSE:CTL) is also a solid company for new investors. Recently, CenturyLink, Inc. (NYSE:CTL) reduced its dividends for the future security of the company. With reduced dividends and a new capital allocation strategy, CenturyLink, Inc. (NYSE:CTL) looks like a safe company for new investors.
On the other hand, Verizon Communications Inc. (NYSE:VZ)’s financial health and cash flow make me nervous about its dividend stability. Additionally, its free cash flow doesn’t adequately cover its dividends.
The article Two Telecom Stocks to Buy, One to Avoid originally appeared on Fool.com.
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