This Dividend Payer Has Frostbite

In December Alaska CommunicationsSystems (NAS: ALSK) announced a 75% cut to its dividend causing shares to plunge. Ouch.

But investors shouldn't have been surprised. A company just can't maintain a dividend payout that's higher than its free cash flow. For the first three quarters of 2011, that meant Alaska Communications paid out $29 million of dividends on only $24 million of free cash flow.

That certainly didn't help the company as it lost $0.02 a share in the third quarter. Losses in 2010 totaled $0.39 a share. But if the analysts polled by Bloomberg Businessweek are right, then the fourth quarter will show a gain of $0.07 a share.

Could that mean a turnaround for the former Alaskan telecom champ? The company, which provides wireline phone and Internet access as well as wireless services, was the top dog carrier in the state until 2007. That was the year AT&T (NYS: T) swallowed up privately held Dobson Communications, taking over 60% of the market along with it.

Since then, Alaska Communications seemed to lose its steam while local rival General Communications' (NAS: GNCMA) pull-ahead was energized by AT&T's intrusion. GCI fought hard against the giant telecom, and against Alaskan Communications, too, with aggressive growth and pricing to hold on to its fixed line customer base.

GCI also successfully went after Alaska Communications' wireless share. Alaska went from 137,500 mobile subscribers in 2007 to 116,200 at the beginning of 2011, while GCI went from only 32,700 to 140,200 in the same time.

GCI was also able to increase its Internet subscribership by 32% to 118,000 between 2007 and 2011, while Alaska Communications remained flat at around 45,000.

But Alaska Communications has announced that it is going to fight to get its wireless subscribers back by spending $20 million toward building a 4G LTE network.

One of the reasons that a major national carrier had not come this far north before AT&T did was the wide distances between the towns where the 710,000 Alaskans live. Other reasons, of course, would be the mountainous terrain that can interfere with wireless signals, and the extreme conditions that make it difficult to install and maintain infrastructure.

In spite of the difficulties and small population, there may be another major carrier invading the Alaska telecom market. Verizon (NYS: VZ) bought some wireless frequencies in 2010 that give it Alaskan coverage. Verizon coming in to the area would affect all the current carriers, but it may have a special impact on Alaska Communications because it currently carries Verizon's roaming traffic in the state. When Verizon does enter the market, Alaska Communications would lose that revenue stream.

Two major carriers fighting over so few potential subscribers would not bode well for either Alaska Communications or General Communications, but the former seems to be in the riskiest position of all.

Alaska Communications did once offer some mouth-watering dividend yields, but investors felt the pain when they had to swallow that huge dividend cut along with the company's falling stock price. For tips on 11 stocks that offer solid dividend returns with minimal volatility, get this free Motley Fool report.

At the time thisarticle was published Fool contributorDan Radovskyowns shares of AT&T. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.