Things could've been worse -- far worse -- for Windstream (WIN +0.00%) and Frontier Communications (FTR +0.00%) investors this week.
Fellow regional telco CenturyLink (CTL 4.05%) slashed its dividend last week, giving Windstream and Frontier the perfect opportunity to sneak their way onto those coattails as they reported fresh quarterly results this week.
The timing also seemed right.
It was a year ago during the prior year's fourth quarter report that Frontier cut its quarterly distributions rate from $0.1875 to $0.10. Frontier has chopped its payouts twice over the past three years.
Windstream has held firm to its $0.25 a share quarterly dividend since late 2006, but it's easy to argue that it's due for a reality adjustment. Profitability has been falling on an annual basis for several years now.
It isn't easy being a regional provider of telecommunications services these days. They're losing landline customers, naturally. The plan to make that back by providing broadband connectivity and business services isn't always enough.
However, all three companies know that investors aren't buying in for their good looks or personalities. Fat yields are attracting income chasers, and the companies know how to shake those moneymakers.
Even CenturyLink's cut -- going from $0.725 a share every three months to just $0.54 a share -- merely adjusts the yield to what would've been 8.5% today to a still-robust 6.3%. Good luck finding that in the high-grade fixed income market.
"Windstream continues to produce substantial free cash flow that enables us to invest in our business and reduce our debt while continuing to pay our $1 annual dividend," Windstream's CEO notes in this week's earnings release. "Our management team and the board of directors unanimously support continuing the dividend at its current rate because we believe it is the best way to create value for our shareholders."
Frontier points out that even though free cash flow declined by 13% in 2012 that last year's dividend cut means that it only returned 41% of its free cash flow to shareholders through distributions in 2012. Windstream, on the other hand, paid out an uncomfortable 77% of its adjusted free cash flow.
This doesn't mean that things will end badly. Sector consolidation will buy some time. New opportunities may arise. There may even be improvement as the economy crawls toward a recovery. Windstream points out that it expects its payout ratio to improve this year as a result of lower planned capital expenditures.
However, investors still can't get comfortable with the chunky yields here. CenturyLink's cut last week -- and Frontier's adjustment last year -- are cruel reminders that dividends are only as sustainable as the business models.
