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Can These 5 Dividend Kings Sustain Their Yields?

January 21, 2012 | About:
Telecom companies are widely known as relatively safe investments. No matter what the economic climate the majority of the population still consider phone service as a necessity. The competition in the market is limited by barriers to entry and with the growing popularity of wireless services… bandwidth space. Although telecom stocks are not widely known for capital appreciation they generally pay out a nice dividend. We shall look at five telecom stocks to gauge the stability of their dividend.

AT&T (T): AT&T provides 22 states with telephone, Internet, and computer telephone services. It is the second largest wireless service provider in the United States. The company has just raised its quarterly dividend again by $0.01. This is a yearly trend the company has been following since 2008 and brings the dividend yield on the stock up to 5.08%. However, it also raises the company's payout ratio to 74%-- at the high end of the company's historical range of between 43% and 91%. This could be attributed to the company's heavy investment in laying down fiber optic cable and slower earnings growth. AT&T currently has $10 billion in cash on hand but they are earmarking the cash to pay for a portion of costs to acquire T-Mobil. It would be prudent to keep abreast of this situation because the company has had to reduce its dividend in the past after overextending itself. On the other hand this is a technology company and being such they have to innovate and find growth in a somewhat saturated marketplace. The company's investment now in fiber optic cable is something all of the telecoms will have to do to remain competitive in the future.

Vodafone Group Plc (VOD): Vodafone Group, based in the United Kingdom, is the largest wireless phone company in the world by market capitalization. The company has interests in 26 countries and partnerships in another 32 countries. Most notably Vodafone Group has a 45% stake in Verizon Wireless under a joint venture with Verizon Communications VZ. The company usually pays a dividend to its share holders twice a year but this is the only consistency in the company's dividend payment methodology. The payout could be anywhere from 0.1012 to 1.1235 and has generally been in the upper two quartiles of this range in recent years. Presently Vodafone Group has a nice dividend yield of 3.50% which seems quite stable at first glance with a payout ratio of only 54%. The stability of the dividend is confirmed additionally by the company's cash on hand of over $10,833.0 million which has doubled in the past five years and is definitely on an upward trend. Vodafone Group enjoys a competitive advantage over competitors in large part through economies of scale in Europe were it can produce and distribute its products more efficiently through established networks. The company also derives over a quarter of its revenue from emerging markets which will be the main driver of future growth.

France Telecom S.A. (FTE): France Telecom S.A. is based in Paris, France. The company is the largest telephone company in France and the third largest in Europe. In the United Kingdom France Telecom and T-Mobile are in a partnership that has created the largest mobile network in the country. Although the company provides services in 32 different countries its central markets at this point in time are France, Spain, Poland and the United Kingdom. Developing countries will represent growth opportunities for France Telecom as the world comes out of the economic slowdown. France Telecom S.A. also pays a dividend twice a year which can range from 0.8477 to 1.8912 and the yield on this payout is generally in the 9.00% range. The payout ratio is currently at a sustainable 61.00% and with cash on hand of $6.46 billion the company is in a good position to continue its relatively high dividend yield. With the events in Europe sending stocks in general ever lower the dividend yield on France Telecom continues to rise creating better buying opportunities. Telecommunications services do not decrease any ware as much as gross domestic product in a downturn. To put this into perspective, the European GDP decline by 4% in 2009 while the market for telecommunications services declined by only 0.8%.

Verizon Communications (VZ): Verizon Communications operates in two business segments Verizon Wireline and Verizon Wireless. Verizon Wireless is a joint venture with United Kingdom's Vodafone Group Plc in which Verizon Communications owns a 55% stake (and controlling interest) and Vodafone Group owns a 45% interest. The venture creates the largest wireless service provider in the United States. The upward trend in smartphone use and wireless data transfer has led to record high profitability in the division. Verizon Wireless currently contributes to about 60% of the company's revenues. The company's launch of its 4G network is the best and fastest mobile broadband network in the world-- ten times faster than its 3G network. The speed of the 4G network has enabled the company to develop V CAST Music and V CAST Mobile TV, the first true mobile TV service in the nation. In 2010 - 2011 Verizon Wireline invested over $20 billion in its Fiber-to-the-Home (FiOS) network making it the leading provider of fiber optic cable service (broadband) in the nation. All this makes the stability of the dividend payment pretty much a given. The upward trend of the dividend payment also makes the stock very attractive. The dividend yield is currently at 5.10% and with the upward trend of the stock itself, capital appreciation adds to this attractiveness.

CenturyTel (CTL): Speaking of capital appreciation, in terms of potential growth, along with a monster dividend…take a good look at CenturyTel. With revenue growth of 162.93% and a dividend yield of 7.90% you can get the best of both worlds all in a tight little package. The company is building its empire through the purchase of only high quality assets. In 2002 CenturyTel purchased 650,000 access lines from Verizon Communications in Alabama and Missouri. The following year the company added Digital Teleport and Midwest Fiber Optic Network to its acquisition list. With the purchase of Madison River Communications in 2007 CenturyTel added 2,400 more miles of fiber optic network (100% broadband-enabled) to its network with substantial growth prospects in Alabama, Georgia, Illinois and North Carolina-- all with a wink and a nod from the FCC. The company is the seventh largest pure-play rural local exchange telephone company in the United States. It serves small to mid-sized cities in 21 states with over 2.1 million telephone access lines. Since 2000 the company has consistently raised its dividend as its revenues have grown. The company also has free cash flow of about $900 million, which is about twice the amount of the current dividend payment, so dividend sustainability is highly probable.

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