In many ways, I'm a fan of bad businesses. I mean it. Look around and you'll see that there's a lot of truth to Peter Lynch's assertion that the best company in a miserable market can make a great investment. (Think steelmaker Nucor (NYSE:NUE) over the past five years.)

All the more reason, then, for my interest in United Online (NASDAQ:UNTD). Seriously, do you know a worse business than dial-up Internet? Broadband service from Comcast (NASDAQ:CMCSA), SBC (NYSE:SBC), and Verizon (NYSE:VZ) is popping up all over the map, even as it drops in price.

United is hedging against this development by rolling out voice over Internet protocol (VoIP) service for its subscribers in Q4. Of course, that puts it in conflict with all sorts of other competitors, including eBay (NASDAQ:EBAY). So far, though, the strategy of reaching beyond Net access has proven beneficial. Sales were up 1% sequentially and 19.9% year over year in Wednesday's third-quarter earnings report. Overall net income declined slightly, but a lower diluted share count boosted per-share earnings by a penny to $0.20.

Best of all, however, United's cash flow steadily increased. Cash from operations, for example, rose to $41.9 million, up 44% from the same period a year ago. That's good, because there's been criticism leveled at United Online that its declining Net access business wouldn't be able to produce the cash flow needed to fund its meaty 6.1% dividend yield. There's just one problem, though: The critics may not be wrong.

Allow me to explain. United Online first began paying a dividend in June. At the same time, the company grew its short-term credit, boosting its accounts payable and accrued liabilities by roughly $11.8 million. With fewer bills to pay, United's operating cash flow ballooned by 43% year over year. And, of course, headroom was made to give shareholders their due.

Fast-forward to Wednesday's earnings report. It's the same pattern. Payables and accrued liabilities were down $1.2 million in last year's Q3. This year? They're up more than $14 million.

Now, what do you think would happen to United if it couldn't push out the terms of its credit? Or perhaps more realistically, what if those terms grew at or around the rate of sales? How would that impact the dividend? Let's examine payments instrumental to the company's operation, in combination with cash flow numbers, to gauge the dividend's viability. Here's what it would have been for each of the past two quarters:


Q3 2005*

Q2 2005*

Operating cash flow



Capital expenditures



A/P and accrued liab. increase



Capital lease obligation



Term loan repayment






Dividend payments made






* Numbers in millions. Data provided by United Online filings.

See what's happening here? There might a legitimate reason for such growth in payables, though it does seem odd. But regardless of the reason, by pushing out terms of credit, United Online is managing to fund a substantial dividend. Net out growth in payables, which seems inordinately high, and you're left with no dividend. Add even markedly slower growth in payables, and you're out of luck.

Bear in mind this equation doesn't include the impact of expensed stock options. Yeah, I know they're a non-cash charge. But options do transfer wealth from owners to employees through dilution. Keeping them in would have run cash flow negative to the tune of $727,000 in the third quarter.

Don't get me wrong. I'm not here to beat up on United Online. But I'd be remiss if I didn't point out the very real risk to the dividend. After all, this isn't Wal-Mart (NYSE:WMT) we're talking about. The Bentonville Behemoth can pretty much dictate whatever payment terms it wants. That's probably not the case with United Online. Not for very long, at least. Which means, dear Fool, you could be the next one on the receiving end of a stiff-arm. Count yourself warned.

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Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking Tim's Fool profile. eBay and SBC are Motley Fool Stock Advisor picks. The Motley Fool has an ironclad disclosure policy.