* CenturyLink dividend cut worries telecom investors
* Windstream CEO promises to keep dividend
* Investors question telecom dividend sustainability
By Sinead Carew
NEW YORK, Feb 22 CenturyLink Inc's 25
percent cut in its quarterly dividend last week has sparked
fears other telecom operators such as Windstream Corp
will follow suit.
While analysts say investors should not worry about
companies such as Frontier Communications and bigger
operator AT&T Inc making dividend cuts any time soon, they
are much less optimistic about Windstream.
Windstream said on Tuesday it will maintain its $1 annual
dividend but its shares have fallen about 14 percent since
CenturyLink's Feb. 13 announcement, as many investors have lost
confidence it would be able to keep its promise.
Windstream Chief Executive Jeff Gardner said it is a mistake
for investors to compare his company to CenturyLink and he
promised to back up the dividend with a big drop in capital
spending and interest expenses this year and next year.
"The fact of the matter is that we have very different
businesses," Gardner told Reuters on Friday, referring to
Windstream's move into business from consumer services and a
stronger competitive position than CenturyLink.
"There's no need for us to cut our dividend, neither this
year nor next year nor in the future," Gardner said.
Telephone companies historically have been able to provide
solid dividend returns due to a steady revenue stream from home
phone customers. Like utility companies, which count on people
always needing electricity, network operators were able to count
on consumers' need for their home phones.
But telecoms has been less predictable in recent years as
consumers have been disconnecting in favor of cellphones,
Internet and telephone services from cable providers.
As a result, operators like CenturyLink and Windstream have
turned to acquisitions and data services for business customers
for growth. They have also leaned on cost cutting and tax
credits to maintain high enough cash flow levels to support
But analysts say that these efforts only take them so far.
"A lot of these companies are carrying the baggage of a
legacy dividend policy that just doesn't make sense any more in
the current business they're operating in," Nomura analyst
Michael McCormack said.
McCormack said "Windstream will probably have to go down the
same path" as CenturyLink because it is unlikely to be able to
cut costs enough to keep its current dividend.
UBS analyst Batya Levi has downgraded her rating of
Windstream stock to 'sell' from 'neutral.'
"Unlike its peers, we believe Windstream management will
make every effort to maintain the dividend and reduce opex/capex
to avoid a cut; however, we do not believe this is a sustainable
strategy," Levi said in a research note.
Moody's credit rating agency placed Windstream's ratings on
review for a downgrade on Thursday, citing its "lack of progress
in reducing leverage and management's recent pledge to continue
its common stock dividend at the current rate."
CenturyLink has kept growing through a series of
acquisitions in recent years, including Qwest Communications and
Embarq Corp. But it said on Feb. 13 that tax credits related to
its acquisitions will run out by 2015. These tax credits had
helped to maintain the company's dividend in recent years.
Another tax issue that could affect telecom operators in the
future is the potential elimination of a depreciation tax
benefit that was recently extended into 2013. This benefit
allows operators to reduce their tax bills by writing off some
of their spending on projects such as network upgrades.
This benefit may be eliminated in coming years, leaving
operators less disposable cash to service their dividend, Wells
Fargo analyst Jennifer Fritzsche said.
"I think it's not just a CenturyLink problem. It's a telecom
problem," Fritzsche said. "I do think taxes are going to be
bigger part of the calculation going forward."
Windstream's Gardner argued that his company is less
dependent on tax credits from acquisitions than CenturyLink and
noted that its credits would last beyond 2015.
He sees Windstream's taxes rising gradually over the next
three years. But at the same time he said "you'll see capital
(spending) declines and interest declines."
Since Frontier last year announced a cut to its dividend by
more than 46 percent, analysts expect it to be able to keep the
current payout level for some time.
"That (Frontier) dividend should be sustainable for the next
15 months or so," Fritzsche said.
While AT&T and Verizon Communications have both been
hurt by the same cord-cutting trends their rural counterparts
face, these companies have been bolstered by their ownership of
wireless services, which is still a growth sector.
Evercore analyst Jonathan Schildkraut said he does not think
the specter of dividend reductions "is a real issue for AT&T and
But even though Wall Street has confidence in such
companies' ability to maintain their dividends, Fritzsche said
investors wanted reassurance about the entire sector.
"CenturyLink has brought a lot of questions to every other
telecom yield play right now," Fritzsche said.
Windstream shares were up 8 cents at $8.47 on Nasdaq Friday
afternoon after falling from $9.81 before the CenturyLink
announcement the week before. CenturyLink shares were up 43
cents at $34.70 on the New York Stock Exchange. It had traded at
$41.69 before it announced its dividend cut.
Frontier shares were up 4 cents at $4.06 on Nasdaq. It had
traded at $4.50 on Feb 13 before the CenturyLink news.