The Best and Worst of the Highest-Yielding Telecom Stocks

5. Windstream

Yield 11.3%

Windstream Corporation (NASDAQ:WIN) primarily operates in rural markets of the U.S. South and has been very aggressive on the acquisition front. The company acquired Iowa Telecom Services two years ago for $1.1 billion and PAETEC Holding last year for $2.3 billion.

While Windstream’s earnings fell 31% in the third quarter to $54 million, the company expects to realize $40 million of annual savings from a recent restructuring and another $100 million of acquisition-related operating synergies by 2014.

Analysts predict 20% EPS growth next year. In the past 12 months, Windstream has generated $581 million of free cash flow and paid out $441 million in dividends. Debt is high at $7.8 billion or 88% of capital, but is down from $8.9 billion at the beginning of this year. Windstream has paid an annual dividend of $1 per share for the past five years.

6. Cellcom Israel

Yield 11.3%

Cellcom Israel Ltd. (NYSE:CEL) holds a one-third share of the Israeli market, but is being hurt by challenges from competitors that have already upgraded to 4G networks. Cellcom is still limited to 3G service.

Because of that, Cellcom’s EPS fell 38% in the third quarter to 32 cents because of subscriber losses, and the company expects further erosion next quarter as it takes steps to adjust expenses to new lower revenue levels. Cellcom took on $421 million of debt last year to acquire Netvision and is using all of its cash flow for debt reduction. The company stopped paying dividends two quarters ago and plans to evaluate future payments on a quarter-by-quarter basis.

7. Consolidated Communications Holdings

Yield 9.8%

Consolidated Communications Holdings Inc (NASDAQ:CNSL) provides high-speed Internet and broadband services to customers in Western and Midwestern states. The company recently paid $340.9 million for regional operator SureWest and anticipates $25 million in annual operating synergies as a result of the merger. Excluding acquisition-related costs, the company’s EPS improved 33% in the third quarter to 28 cents.

While the acquisition also left Consolidated with long-term debt of $1.2 billion (roughly four times cash flow), the company has restructured its debt so there are no debtmaturities in the next five years. Cash-flow coverage of the dividend is 140% and Consolidated has paid a 39-cent quarterly dividend 20 quarters in a row.

Risks to Consider: Foreign companies often tie dividend payout to earnings, which can result in cuts in the dividend, even if the business still has plenty of cash and cash flow. All of the foreign companies described above have either cut or eliminated dividends altogether in the past 12 months. U.S. companies are far less inclined to slash the dividend even during tough times.

Action to Take –> I wouldn’t even consider owning a stock that misses dividend payments such as Cellcom Israel or one totally revamping its business model such as City Telecom. NTELOS is risky because of its contract situation. Either of the European telecoms (France Telecom and Portugal Telecom) may appeal to investors willing to wait for Europe’s economic recovery. These European telecom giants aren’t likely to disappear anytime soon, both continue to generate plenty of cash flow and yields remain attractive even at the lower dividend rates.

With that said, my top picks for overall safety are Consolidated Communications and Windstream. Both of these companies are gaining synergies from recent acquisitions, have good cash flow coverage of the dividend and are focused on reducing debt. Windstream trades at a lower forward price-to-earnings (P/E) ratio than Consolidated (16 versus 21), which suggests Windstream may be a better value.

This article was originally written by Lisa Springer, and posted on StreetAuthority.