This article will take a look at three companies in the telecom sector. Recent dividend cuts by these companies will be presented. It will also analyze whether or not they can maintain and eventually grow their dividends. Furthermore, it will present a case that these companies have shown a recent history of cutting dividends and a weak ability to maintain their dividends compared to the leaders in the sector.
Dreaded dividend cuts
I was a shareholder of Frontier Communications Corp (NASDAQ:FTR) in early 2012, and had a large position of shares relative to my portfolio at the time. My cost basis in those shares was about $7 per share. Its dividend for the quarter of March 2012 was cut from $0.188 per share to $0.10 per share.
A few days prior to cutting the dividend, Frontier Communications Corp (NASDAQ:FTR)’s CEO reiterated that the dividend was safe. When the dividend cut was subsequently announced, it completely decimated my faith in the company. It was not completely unexpected, as the company’s revenue was suffering due to losses in land-line subscribers.
Frontier Communications Corp (NASDAQ:FTR) stated when it cut the dividend that it would put the company in a stronger financial position. For a shareholder like me at the time, it essentially guaranteed that the stock was not going to go back up to $7 anytime soon. It seemed much more likely to me that the dividend cut was as a result of deteriorating financial results rather than savvy financial planning.
CenturyLink, Inc. (NYSE:CTL) slashed its dividend for the quarter of March 2013. It was a steep cut that sent its shares stumbling. It has leveled out since at around $35 per share, and it has a dividend yield fairly close to what it had before the dividend was cut.
The reasoning for CenturyLink, Inc. (NYSE:CTL)’s dividend cut was more believable to me, as it was to put the money to use in buying back shares and paying down debt. The company is still expected to grow its earnings this year and next year, and is clearly profitable. That lends more confidence to me that this company is still a good investment for the long term despite the fact that I would not put new money into it at this time.
Windstream Corporation (NASDAQ:WIN), on the other hand, has maintained its $0.25 per-share quarterly dividend since 2006. It is the only company out of these three to not have recently cut its dividend. Despite this, it is clear that none of these companies have increased their dividends either, and a dividend-growth investor might feel much better in the industry leaders such as Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T) for this reason.
Frontier Communications – What to do
The question that current or prospective investors should ask themselves when pondering investments in Frontier Communications Corp (NASDAQ:FTR) is whether or not the company can maintain its dividend and rise in price from here. In recent years, including last year to now, the company has been flat to negative in share price. The only returns seen have been from its dividend, and even with that, its performance has lagged the likes of Verizon Communications Inc. (NYSE:VZ).
I originally was drawn to Frontier Communications Corp (NASDAQ:FTR)’s stock because it acquired the land-line assets of Verizon. Its expertise in rural land lines was supposed to put it in a strong position to profit from these assets. So far, that has proven to be wishful thinking.
The company is expected to earn $0.22 per share this year, down from $0.26 last year. Next year, it is only expected to earn another $0.22 per share. Its dividends are based on free cash flow, and a further deterioration of revenue could eventually make its current dividend yield unsustainable.