It's easy to spot high-yielding investment opportunities. But it's a daunting task to find companies that can truly sustain their high yields without straining their financials; a careful analysis of their financial strength is needed.
Let's take a look at Verizon (VZ 0.80%), Frontier (FTR +0.00%), and Windstream (WIN +0.00%) – leaders in the telecom industry – and find out how secure their dividend payouts really are.
Debt load
Analyzing the debt load of a company provides vital insights about its dividend sustainability. Windstream, for instance, is heavily leveraged. The company paid out 84.5% of its operating income in the previous quarter – leaving little reserves behind – just to cover its interest expenses. When its long-term debt matures, eventually, Windstream may have to slash its dividends in order to repay its lenders.
|
Most Recent Quarter | ||||
|---|---|---|---|---|
|
Debt/equity |
Total Debt |
Operating Income |
Interest Expense | |
|
Verizon |
8.64 |
$109.77 billion |
$7.16 billion |
$1.21 billion |
|
Frontier |
2.01 |
$8.12 billion |
$226 million |
$170.96 million |
|
Windstream |
10.36 |
$8.76 billion |
$167.8 million |
$141.9 million |
Frontier, on the other hand, faces no such imminent threat. Its debt load is fairly limited -- the telecom company can raise and restructure its debt as per its needs. Meanwhile, the company can continue to reward its investors with sustained dividend payouts.
Among the mentioned peers, Verizon carries the largest amount of debt. In spite of that, the telecom behemoth paid out merely 16.9% of its quarterly operating income to cover its quarterly interest expenses. Its favorably structured debt suggests that Verizon won't have to compromise on its dividend payouts in order to repay its lenders.
Payout ratio
The dividend burden on a company is another crucial determinant of its future payouts. Verizon, for example, distributed $5.98 billion in dividends and generated about $20.6 billion in free cash flow, or FCF, over the last 12 months. Its dividend cover of 3.44 times – one of the best in its industry – indicates that the telecom giant can sustain its future dividend distributions comfortably.
|
Verizon |
Frontier |
CenturyLink |
AT&T |
Windstream | |
|---|---|---|---|---|---|
|
Free Cash Flow Payout Ratio* |
29% |
46.6% |
52% |
73.8% |
75.8% |
* Calculated by (TTM Total Dividends*100/TTM Free Cash Flow)
Similarly, over the last 12 months, Frontier generated about $858.1 million in free cash flow and distributed $400 million in dividends to common and preferred stockholders. Its dividend cover of 2.14 times – though, not as impressive as Verizon's – suggests that the telecom stalwart has ample dividend cushioning as well.
Windstream, however, has the least impressive payout ratio. The telecom company distributed about $595.4 million in dividends while generating $784.1 million in free cash flow over the last 12 months. Its low dividend cover of just 1.31 times suggests that a sharp downswing in Windstream's operating cash flow can deem its dividends unsustainable.
Growth
Investing in growing companies also contributes in securing and stabilizing future dividend income.
| Company |
Capital Expenditure YoY Change |
ROI |
|---|---|---|
|
Verizon |
5.74% |
19.8% |
|
Frontier |
4.85% |
6.4% |
|
Windstream |
(33.1%) |
9.2% |
Data from YCharts
As illustrated in the table above, Verizon and Frontier have ramped up their investments substantially over the last year. Since Verizon has a healthy trailing 12-month return on investment, or ROI, investors can expect its investments to yield handsome returns over the coming years.
Considering that Frontier sports a relatively lower ROI, its growth rate may not necessarily match Verizon's. But Windstream, with its substantial cuts in capital expenditures, may find it hard to grow its top line over the coming years.
Foolish final thoughts
Clearly, Verizon and Frontier appear to be in a financially sound position. They have ample dividend cushioning to reward their investors with generous dividend hikes over the coming years. Investors, therefore, might want to avoid Windstream and consider holding both Verizon and Frontier to hedge their risks and diversify their rewards.
