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AT&T Inc. (T), Verizon Communications Inc. (VZ) & CenturyLink, Inc. (CTL): Two Telecom Stocks to Buy, One to Avoid

AT&T Inc. (NYSE:T)The telecom-services industry is one of the top-performing sectors in the world, and many companies operating in this market offer hefty dividends. In this article, I will pick two companies from the telecom-services industry that have solid dividends and one company to avoid.

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.

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