Unlike Frontier, AT&T Inc. (NYSE:T) steadily raises its dividend. In 2012, AT&T Inc. (NYSE:T) paid out 50% of its free cash flow out in dividends. Currently AT&T Inc. (NYSE:T) pays $1.80 per share per year in dividends.
AT&T Inc. (NYSE:T) currently shows a little better future than Frontier. Its wireless segment, which comprises 52% of its 2012 revenue, grew 6% last year, stemming from a 4% increase in its wireless customer base.
Contrast that with AT&T’s wireline (more commonly known as landline) segment, which showed a 1% decrease last year. Its voice segment (representing its traditional talk business) revenue has shown a steady decline for quite some time with it decreasing 10% in 2012.
AT&T possesses a slightly better balance sheet than Frontier. Cash on hand only calculates to about 5% of its stockholder’s equity. Its long-term debt to equity stands at 72% of its equity base. Its operating income exceeds its interest expense by four times.
AT&T’s size limits the company’s revenue and cash flow potential and consequently its dividend. AT&T’s wireless segment will provide some growth while revenue declines in its wireline segment will wipe most of that growth away like an eraser on a chalkboard.
Frontier’s loss is this company’s gain
Another telecommunications giant, Verizon Communications Inc. (NYSE:VZ) currently provides its investors with a 4% dividend yield. This company provides the highest margin of safety with operating income exceeding interest expense by five times. It only paid out 46% of its free cash flow in dividends, currently paying $2.06 per share per year.
In a prudent strategic maneuver in 2010, Verizon Communications Inc. (NYSE:VZ) sold a huge portion of its landline assets, specifically in rural regions, to Frontier. Currently, Verizon Communications Inc. (NYSE:VZ)’s wireless segment comprises 66% of its overall revenue, growing 8% in 2012. Contrast that with the revenue decline of 2% in Verizon Communications Inc. (NYSE:VZ)’s wireline segment.
Verizon Communications Inc. (NYSE:VZ) also sports the best balance sheet in terms of debt load. Its long-term debt to equity ratio stands at 56%. However, its cash only calculates to 4% of stockholder’s equity.
Like AT&T, Verizon Communications Inc. (NYSE:VZ)’s wireline segment will serve as a future drag on overall growth in revenue and cash flow.
You should look for Frontier’s 10% dividend yield to disappear altogether due to crushing debt and a declining market for wireline services, even in rural areas, as companies such as AT&T and Verizon make inroads into those markets with wireless products. Moreover, look for AT&T and Verizon to garner small amounts of overall growth from their wireless segments. If you invest in these two companies expect them to function more like bonds with basically a flat line stream of dividend income with small to no increases. If you want growth, look beyond the old telecommunication bellwethers.
William Bias has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. William is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Beware of High Dividend Yields? originally appeared on Fool.com is written by William Bias.
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