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What's Wrong With This Double-Digit-Dividend Stock?

This has not been a good week for the dividend kings of the telecom industry.

Alaska Communications Systems (Nasdaq: ALSK  ) missed second-quarter-earnings estimates by a frozen country mile when it reported a $0.02 loss per share. The stock fell as much as 4% on the news, though shares then climbed back up again. The company's commitment to Apple's iPhone may still turn out to be the right decision -- but the jury is out on that one.

And then Windstream (NYSE: WIN  ) comes along with another big plunge. The regional voice, video, and broadband carrier's second quarter failed to impress investors last night, sending share prices as far as 9.3% southward.

The most commonly reported results weren't all that terrible: Windstream met analyst estimates with $1.5 billion in revenue and missed adjusted earnings targets by a hair with $0.12 per share.

But free cash flows shrank 40% year over year due to heavy investment in optical fiber connections to wireless towers. I do applaud Windstream's management for investing in its future -- these expenses should start paying off in 2013 and beyond. But the company had to dip into cash reserves to fund its generous dividends this quarter. Management claims to be comfortable with its cash generation and dividend policies going forward, but this was a scary quarter nonetheless.

Windstream also announced its 25th straight quarter of dividend payments at $0.25 per share. That's not "25 quarters of uninterrupted dividends, and the last one happened to be $0.25." It's literally more than six years stuck at exactly the same payout. If stability is your thing, that's cool. Some stocks aren't this lucky. Frontier Communications (NYSE: FTR  ) , for example, has slashed its payouts by 60% over the last three years. Telefonica (NYSE: TEF  ) put its dividend entirely on ice last month. Windstream is at least able to keep a steady income stream flowing.

However, true dividend aristocrats tend to increase their payouts year by year, and that's clearly not something Windstream can afford to do. Windstream's 10% yield does not make it an automatic income champion.

Is Frontier's dividend policy permanently damaged or will that yield spring back to life again? Find out what our top telecom analysts think in this brand-new premium report on Frontier. The lessons learned there should help you get a stronger grasp on the industry as a whole, and the report even comes with 12 months of updated analysis for free. Get informed right now.

Fool contributor Anders Bylund holds no position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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  • Report this Comment On August 09, 2012, at 7:00 PM, MHedgeFundTrader wrote:

    Steve Jobs’ creation dropped a real bombshell on the market Tuesday when it announced Q2, 2012 earnings that were rotten to the core. The timing could not have been worse for a market that was on the verge of complete nervous breakdown. Of the 53 brokers who provided research coverage of the Mountain View, California firm, 27 rated it a “buy”, 21 “outperform”, and precisely zero “underperform”. And you wonder why retail has bailed on Wall Street.

    The numbers made grim reading. Sales, which had been targeted at $37 billion came in at only $35 billion. Profits amount to $8.82 billion, taking earnings per share to $9.32, well down from the $10.37 expected. Estimates for iPhone sales had run as high as the low 30 millions. The actual figure was 26 million. In overnight trading, the shares opened down a gob smacking $40, instantly vaporizing $37 billion in market capitalization.

    Apple is suffering from the mother of all delayed consumption headaches. Consumers love their products so much they have gone on strike until the vastly upgraded and better performing iPhone 5 is launched in the fall, yours truly included. So the dip in profits will reappear as a spike in profits in the next one or two quarters. This means that if you missed the 50% run up since the beginning of the year, you may have a chance to take another bite at, well, the apple.

    Apple is not just an IPhone story. The mini iPad is expected out soon. Apple TV is expected to be huge next year. Apple has only just scratched China’s market of 600 million cell phone users. Its six stores are regularly the scene of long lines, and occasional riots by consumers desperate to buy their products. Droves are crossing the border by train from Shensen to Hong Kong, where Apple products are more easily available.

    In the spring I lead readers into the August $400-$450 call spread which became one of our most profitable trades of the year. I took them out a month ago because we had already squeezed out most of the profit, and because I thought that exactly this kind of disappointment might occur.

    The intelligent thing to do here is to wait for the current shock to work its way through the system. You also want the present melt down in the broader market to exhaust itself. That could take us well into August. The best-case scenario here is that you get back in when the stock falls all the way down to its June low at $525. If it then drops below $500, double up. This would be a once in a lifetime gift.

    Mad Hedge Fund Trader

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10/27/2016 3:58 PM
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