Your Landline May Be the Key to Big Dividend Checks
It's a grim trend that would make this a scary area for shareholders, but good luck trying to tell income-chasing investors to stay away. Despite their dubious growth prospects, Frontier Communications (FTR), CenturyLink (CTL) and Windstream (WIN) have been attracting investors based of the strength of their generous quarterly distributions.
Frontier and Windstream -- and to a lesser extent CenturyLink -- have tried to go where the big boys won't. They concentrate on smaller markets where traditional phone services are still in demand, and they don't have to compete as hard with the titans of telco. It's an interesting strategy. It has long-term flaws, but the three stocks are still magnetic to investors that put up with the shortcomings in exchange for fat dividend checks every three months.
How meaty are the disbursements here? CenturyLink yields 5.9 percent, and it's at the low end of the niche. Windstream is the most generous payer with a hefty 9.9 percent payout. Frontier straddles the two with its 7 percent yield. All three reported quarterly results this week, giving the market some valuable insight on the sustainability of their popular distributions.
It's important to remember that these three companies aren't merely selling landlines. You don't stick around if you're only selling buggy whips, Beanie Babies and Milli Vanillii CDs. Frontier, CenturyLink and Windstream are trying to offset the folks canceling their home phone lines and millennials who have no intention of ever having them by selling more relevant broadband connectivity. They also offer businesses a growing array of corporate communication services.
For the most part, these efforts haven't been enough to grow the overall business. Frontier kicked off the three days of earnings reports on Tuesday, checking in with a 0.6 percent decline in revenue. CenturyLink reported quarterly results on Wednesday. Revenue clocked in at $4.1 billion, 0.2 percent lower than it did a year earlier. Windstream rounded up the earnings reports on Thursday morning. Its revenue slipped 2 percent to $1.5 billion.
They weren't substantial downticks, but all three posted year-over-year declines in revenue.
Dialing the Wrong Number
Investors in all three companies are realistic. They're not expecting to see top-line growth. Analysts see all three companies posting slight declines in revenue for all of 2014. They key is to slow the process long enough to be able to sustain the generous payouts.
Frontier merely met Wall Street's profit target, but Windstream missed again. It has now come up short on the bottom line in four of the past five quarters, and, as the one with the chunkiest yield, it's also the one that's the most vulnerable.
In an interesting twist, Windstream announced a few days ago that it plans to spin off some of its telecommunications network assets into a real estate investment trust. It will allow investors to either buy into its high-yielding yet slipping home phone service -- taking advantage of a REIT structure to maximize income -- or stick with its other services that are growing modestly without the beefy distributions.
It remains to be seen if Frontier will go that route. CenturyLink probably won't. It's larger and better positioned to invest in growing services. It announced on Tuesday that it's expanding of its speedy gigabit service to 16 cities.
All three investments have varying amounts of risks, and it's probably fair to say that the higher the yield the bigger the risk in the three stocks. (We talked about the dangers of chasing the highest dividend yields here.) However, for investors eyeing large payouts every three months these three meandering yet risky telecommunications investments may be too tempting to ignore.
Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Get The Motley Fool's free report on nine dividend stocks our top analysts recommend for every income investor's portfolio.