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

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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