Windstream Corporation (WIN), Frontier Communications Corp (FTR): How Safe are the 3 Largest Dividend Yields in the S&P 500?

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The benefits of dividend investing are well known.

Companies with high dividend yields can offer both protection and support in any market environment. In a falling market solid dividends can reduce a portfolio’s losses and in a rising market, such as today’s, a strong yield can be used to improve performance and offset inflation while interest rates are low.

The question is, can the largest dividend yields in the S&P 500 be considered safe and secure for investors who are seeking to protect their portfolio or enhance returns with high yield stocks.

Let’s examine that.

The highest yields

Company P/E Dividend yield EPS DPS Payout Ratio
Windstream Corporation (NASDAQ:WIN) 30.6 12.1% $0.27 $1 370%
Frontier Communications Corp (NASDAQ:FTR) 26.6 9.4% $0.16 $0.4 250%
CenturyLink, Inc. (NYSE:CTL) 25.7 6% $1.41 $2.16 153%

Windstream has the highest yield in the S&P 500 followed closely by Frontier and then CenturyLink. Although, at first glance, none of the three companies above are able to cover their payouts with earnings but how do their cash flows look?

Windstream Corporation (NASDAQ:WIN)


Metric Q2 2012 Q3 2012 Q4 2012 Q1 2013
Net Operating Cash Flow $398 $406.8 $534 $304.6
Net Investing Cash Flow $287.6 $342.6 $295.8 $234.5
Cash Available for Financing Activities $110.4 $64.2 $238.2 $70.1
Dividends Paid $147 $147 $147.5 $148.1
Change in Capital Stock $0 $0 $0 $0
Issuance/(Reduction) of Debt $15.3 $148.4 ($75.7) $6.5
Free Cash Flow -$50.8 -$78.5 $163.5 -$87
Dividend Cover from Cash Available for Financing Activities 0.8x 0.4x 1.6x 0.5x

Figures in $US millions. Financing activities include dividend payouts, changes in capital stock and the movement of debt.

Windstream Corporation (NASDAQ:WIN) provides offers managed cloud computing services to businesses as well as the provision of broadband, voice and video services to residential, mainly rural customers.

Yielding 12.1% the company’s payout is around the same as many highly leverage mREITs and, as a result the yield is highly suspect. Indeed, as shown above, the company is not able to cover its dividend payout with its earnings-per-share.

The company’s cash flows reinforce the fact the company is indeed paying out more than it can afford. For the last four quarters, Windstream has only been able to cover its dividend payout once with its available cash flow, (after the deduction of investing activities).

During Q4 of 2012, Windstream Corporation (NASDAQ:WIN) was able to cover its payouts to shareholders but that has been the only quarter out of the last four where this has been the case. Indeed, during the other three quarter shown above the company has not been able to cover its payouts and has had to rely on borrowing in order to support payouts – which is not sustainable.

So, based on Windstream Corporation (NASDAQ:WIN)’s borrowing and lack of dividend cover I believe that the payout is unsafe and could be at risk of being cut in the near future.

Verdict: unsafe

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