Are These Dividends Safe? AstraZeneca plc (ADR) (AZN), Two Harbors Investment Corp (TWO), Windstream Corporation (WIN)

AstraZeneca plc (ADR) (NYSE:AZN)

Market cap $56.83B
P/E ratio 9.15
EPS $4.99
Dividend $2.85
Div. yield 6.32%

From this quick overview, it appears AstraZeneca plc (ADR) (NYSE:AZN) is able to cover its dividend from EPS. Astra paid out dividends of $2.85 during 2012 on EPS of $4.99.

$US 03/01/2012 06/01/2012 09/01/2012 12/01/2012 Average
EPS 0.81 0.8 0.77 0.76 0.79
Dividend 1.95 0 0.9 0 0.71
Cover from EPS 0.4 0.0 0.9 0.0 1.1

However, on a quarterly basis the company is not able to cover its dividend. That said, taking into account the average figures across the year, shown at the end of the table it would appear that on a yearly basis AstraZeneca plc (ADR) (NYSE:AZN) is able to cover its payout at least once from earnings.

$US Millions 03/01/2012 06/01/2012 09/01/2012 12/01/2012
Net Operating Cash Flow 1540 2791 4100 6948
Net Investing Cash Flow 593 1353 -1345 -1859
Cash Dividends Paid -2505 -2505 -3665 -3665
Change in Capital Stock -912 -2505 -2273 -2206
Issuance/(Reduction) of Debt, Net (34) (62) 1492 917
Net Financing Cash Flow -3438 -4156 -4398 -4923
Net Change In Cash -1291 -20 -1633 162
Free Cash Flow -657 719 17.2 1600

AstraZeneca plc (ADR) (NYSE:AZN)’s net cash flow leaves plenty of room for dividend payments after the deduction of investing cash flows.

The company was buying back stock during 2012 and it looks like this put pressure on cash flows. Indeed, in the third quarter of 2012, AstraZeneca plc (ADR) (NYSE:AZN) had to issue $2.5 billion of debt to fund part of its buybacks. However, AstraZeneca plc (ADR) (NYSE:AZN) has announced that it will not continue its buyback program into 2013, which will reduce the pressure on the company’s cash flows.

Still, excluding the effect of stock buybacks dividends remained well covered and the company actually had a positive free cash flow for the last three quarters of 2012.

AstraZeneca passes this dividend test now it has stopped buying back stock.

Windstream Corporation (NASDAQ:WIN) 

Market cap $5.26B
P/E ratio 28.84
EPS $0.31
Dividend $1
Div. yield 11.20%

With a yield of 11.2% it appears that Winstream is not able to cover its dividend from EPS. The company paid out $1 in dividends during 2012 on earnings of only $0.31.

$US 12/01/2011 03/01/2012 06/01/2012 09/01/2012 Average
EPS -0.03 0.11 0.09 0.09 0.07
Dividend 0.25 0.25 0.25 0.25 0.25
Cover from EPS -0.1 0.4 0.4 0.4 0.3

Windstream Corporation (NASDAQ:WIN)’s inability to be able to cover its dividend is highlighted further in its quarterly figures. On a quarterly basis the company has not been able to cover its dividend from EPS for the past twelve months. For the past four quarters the company has an average quarterly dividend cover of only 0.30.

$US Millions 12/01/2011 03/01/2012 06/01/2012 09/01/2012
Net Operating Cash Flow 309 438 398 407
Net Investing Cash Flow -126 -176 -288 -343
Cash Dividends Paid -129 -147 -147 -147
Change in Capital Stock 0 0 0 0
Issuance/(Reduction) of Debt, Net 135 (272) 15.3 148
Net Financing Cash Flow 9.3 -426 -137 13
Net Change In Cash 193 -163 -27 77.3
Free Cash Flow -25 54 -51 -79

Despite the fact that Windstream Corporation (NASDAQ:WIN)’s EPS are not sufficient to cover dividends, the company’s cash flows tell a slightly different story. If the investing cash flow is deducted from the operating cash flow, the company has plenty of cash left over to pay its dividend. Furthermore, in the first quarter of 2012, the company had enough free cash to buy back some debt.

However, despite the good performance in the first quarter of 2012, the company fell behind in the third quarter and was forced to issue debt to sustain the dividend.

Overall, Windstream Corporation (NASDAQ:WIN) is on a knife edge and I do not believe the current dividend is sustainable.