Investors are hanging up on CenturyLink (NYSE: CTL ) .
Shares of the regional provider of telecom services opened 19% lower this morning.
Intellectual Ventures has targeted CenturyLink as one of several DSL Internet providers in a patent infringement suit, but the real killer here is that the company slashed its dividend last night. CenturyLink -- the 2010 combination of CenturyTel and Embarq -- will shave its quarterly dividend from $0.725 a share to $0.54 a share.
The 26% haircut in yield isn't a surprise. The gains that CenturyLink is achieving in high-speed Internet access and its Prism TV television platform are being offset by the loss of landline customers. CenturyLink wasn't earning enough to justify its quarterly distributions of $0.725 a share, especially now when it seems that a future of organic growth just isn't in the cards.
Shares of fellow regional telco peers Windstream (NASDAQ: WIN ) and Frontier Communications (NASDAQ: FTR ) are also trading sharply lower on the news. All three companies are in the same boat, wooing income investors with their chunky yields that aren't sustainable in a challenging climate for growth.
Will Windstream and Frontier Communications follow CenturyLink in whittling down their disbursements? If they do, it will probably happen next week. Windstream reports on Tuesday. Frontier Communications follows two days later.
You can expect the shares to be volatile between now and then, though if the sell-offs continue, the stocks may pop on the news if they either hold their yields steady or announce smaller dividend cuts than expected.
This will always be the peril of chasing high yields. The sustainability of lofty payouts matters more than a fat dividend. CenturyLink investors know that now. They've lost three years' worth of dividends with today's drop in share price.
Now the spotlight's burning in the eyes of Windstream and Frontier Communications -- two companies that have held steady in addressing underserved rural markets where the big boys largely stay away -- to prove that they're not the next CenturyLink.
When it comes to dividend yields, you won't find many higher than Frontier. While its juicy dividend is tempting, every Frontier investor has to understand that it's not a sure thing. A huge acquisition has transformed the company forever. Will the move bear fruit, or are investors destined for another disappointing dividend cut? In this premium research report on Frontier Communications, we walk you through all of the key opportunities and threats facing the company. Better yet, you'll receive a full year of updates to boot. Click here to learn more.