What Telecom Stocks Can Teach You About Dividends

For all that we've said about dividends here at the Motley Fool, it can still be difficult to select dividend payers for your portfolio. Let's take a closer look at some telecommunications companies, which can be a crucial part of a dividend portfolio, and analyze both their dividend policies and their commitment to implementing those policies. In the process, you may pick up a few useful strategies for evaluating high-yielding stocks.

Meet our telecom players
To simplify the process, we'll look at six semi-randomly selected contestants among high-yielding telecommunications companies. The table below displays their year-to-date, dividend-adjusted returns, as well their current dividend yields:

Company

Total Return (YTD)

Dividend Yield

AT&T (NYSE: T  )

8.46%

5.9%

Chunghwa Telecom (NYSE: CHT  )

33.20%

4.3%

Telefonica S.A. (NYSE: TEF  )

0.52%

4.9%

Frontier Communications (NYSE: FTR  )

19.69%

8.5%

France Telecom S.A. (NYSE: FTE  )

0.03%

5.6%

CenturyLink (NYSE: CTL  )

20.45%

7%

Let's discuss dividend policies
Now that we're familiar with the performance and dividend yields of these telecommunication stocks, we need to know how each company's management intends to return future cash earnings to stock owners.

In its latest annual report, AT&T states: "Our dividend policy considers both the expectations and requirements of stockholders, internal requirements of AT&T and long-term growth opportunities." This may not give shareholders an exact dollar estimate of dividends, but at least it affirms a commitment to pay them.

Chunghwa Telecom has no stated dividend policy. However, Chairman Lu Shyue-ching recently stated that his company will have a "dividend payout that is good for everyone." Don't assume that Chunghwa has dividend commitment anxiety; as we'll discuss below, that's not the case.

In contrast to the vague dividend policies of AT&T and Chunghwa, last year Telefonica S.A. announced its intention to pay a dividend of 1.40 euro per share in 2010, and to increase this to a minimum of 1.75 euro per share by 2012. After acquiring Verizon's local operations in 14 states, Frontier Communications recently announced a new dividend policy, setting an annual payout of $0.75 per share. These policies give us easy benchmarks against which to measure these companies' actual payout performance.

Meanwhile, France Telecom S.A. has a stated dividend policy of paying out between 40%-45% of its organic (pre-acquisition) cash flow to shareholders. Although this isn't as specific as the guidance Telefonica and Frontier provide, it's less hazy than Chunghwa and AT&T's.

Finally, while CenturyLink states that it plans to maintain its current dividend practice, it also provides no guidance on its future dividend intentions, thus joining Chunghwa and AT&T in our dividend doghouse. Bear in mind that given its upcoming megamerger with Qwest, CenturyLink might have to be more conservative with payouts if integrating the two companies costs more than expected.

Fools should always prefer clearly stated policies to ambiguous ones. Still, dividend policies aren't worth the paper they're written on without real performance to support them. Let's examine what these firms have actually done with their dividends, versus what they're telling their investors.

Show me the money
We'll start with the telecoms that seem to fear dividend commitment: AT&T, CenturyLink, and Chunghwa. These companies apparently believe that actions speak louder than words. All three have shown a commitment to paying dividends, and AT&T and CenturyLink have consistently increased them. However, their lack of dividend policy makes predicting future payouts tricky.

Among companies with stated policies, Telefonica seems to be falling short of its goals.  It's only paid out 1.30 euro per share to date, and it's unlikely to make any more distributions this year.

Frontier Communications recently ratcheted back its dividend rate to $0.1875 per quarter. Since it's maintained an annual dividend of $1 per year for the last three years, it should be able to live up to the metrics in its dividend policy -- as long as its latest merger isn't a disaster.

France Telecom landed at the top end of its target payout range last year. However, its payout is based on cash flow, which can be difficult to predict. That leaves its shareholders more in the dark than owners of Telefonica or Frontier.

Investing ramifications
Between dividend policies and actual results, Frontier Communications looks like the best dividend play for this group. It's proved that it can follow through on its clearly stated policy. Its sizable payout isn't infallible, but at least Frontier displays the consistency and transparency that investors should seek when appraising dividend stocks.

Fool contributor Gerard Torres has no beneficial interest in any of the companies mentioned in this article. France Telecom is a Motley Fool Income Investor recommendation. The Fool owns shares of Telefonica. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool disclosure policy never gets disconnected.


Read/Post Comments (4) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 02, 2010, at 6:30 PM, midnightmoney wrote:

    Are you saying that we ought to to ascertain an actual written dividend policy before investing in a dividend-paying company? From the yearly reports that I could bear to read it seemed pretty clear to me that dividends could be cut at any given moment for any number of reasons, just as the value of the shares could tank for similar ones. I would expect as much and would therefore tend to trust att more as it doesn't set up any false hopes. I recall BP paying north of $3/share earlier this year. No idea if they offered a dividend policy there, but it would have been so many words for a fierce gulf wind. Sticking for now with att, but thanks for the insight on frontier communications.

  • Report this Comment On November 02, 2010, at 6:59 PM, midnightmoney wrote:

    having compared att's and frontier's balance sheets, payout rates, debt levels and just about any other category, I'd strongly reiterate my preference for the behemoth of the two. Suggesting frontier is the sounder investment flies in the face of a lot of the sound advice on avoiding risk I've read here on the fool. What am I missing, Gerard?

  • Report this Comment On November 03, 2010, at 12:01 AM, aleax wrote:

    You say: "France Telecom landed at the top end of its target payout range last year. However, its payout is based on cash flow, which can be difficult to predict. That leaves its shareholders more in the dark than owners of Telefonica or Frontier." -- given that, as you point out, Telefonica promises and does not deliver, how can that possibly be the case?!

    Having been born and raised in Europe, I'd almost set the disagreement down to a Transatlantic issue -- where it not that (a) Telefonica is from Spain, AND (b) one of my favorite stocks, RGR, is *oh so very* American (2nd Amendment fans might say "quintessentially so"!-) and also pays a dividend that depends on the company's performance and need for funds.

    My first axiom of value investment is: I think of myself as an owner of the business. Not very original (Graham and Buffett onwards, they all stress this viewpoint!-), but, solid.

    If I owned a business outright, say a shop, would I want to take out a fixed amount of cash every quarter (no matter whether this leaves the shop stunted for growth, or needing debt, or swimming in surplus unneeded cash), or would I want an amount that varies up or down to always leave in the shop's ready cash a prudent and sufficient supply for the coming quarter's needs and opportunities?

    Apparently the average American investor prefers the former route, the average European investor prefers the latter. (I doubt this is the case for actual business owners, or else American business would be in dire straits indeed;-) (OTOH, I do much prefer the quarterly pace that's typical of American dividends, to the yearly one -- perhaps with a mid-year "little top up" -- typical of European ones; the former is much less disruptive to the normal flow of trading in a stock). Guess that makes me quite unusual (in the US, where I've been living and investing for years now) among income-focused investors!-)

  • Report this Comment On November 03, 2010, at 12:41 PM, RavenandSunny wrote:

    If Frontier Communications follows the same path as other companies that have fallen into the "spin-off" trap set by Verizon, FTR will be a losing proposition. Idearc & Fair Point Comm. have learned that lesson painfully. It took about a year or so before Fair Point realized the trap they had fallen into in the Northeast with their acquisition of Verizon's landlines. FTR was looking very good to me UNTIL Verizon became part of the equation. I sold my Verizon shares to avoid getting burned a third time with their divestiture of assets to FTR that they figured were going to cost them too much to upgrade to fiber optics. At some point I will buy Verizon again, but definitely not Frontier. I live in the NE and have a Fair Point landline, and saw the trap they were falling into when they first contemplated the deal with Verizon. Fair Points shares are now worth 2 cents, literally. Caveat emptor.

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