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NEW YORK (Reuters) - Shares in rural telecom service provider CenturyLink Inc (CTL.N) fell sharply on Thursday after the company said it was cutting its dividend by 25 percent and posted weaker than expected quarterly results.
The news also drove shares of another rural provider Windstream Corp (WIN.O) down 7.4 percent in sympathy.
Investors in traditional telephone companies are typically attracted to them because of their tendency to pay dividends but people have been disconnecting home phones in favor of cellphones, Internet and cable provider services.
Several analysts cut their ratings for CenturyLink stock after the company announced a buyback program and a plan to use cash to pay off debt instead of the higher dividend payment.
Macquarie Securities analyst Kevin Smithen downgraded the stock to "underperform" after the company said it would cut its quarterly dividend to 54 cents from 72.5 cents while it promised to buy back $2 billion of shares by February 13, 2015.
Smithen said that higher than expected capital spending guidance and weaker than expected earnings targets "added to the pain felt by income and yield investors."
Another analyst Donna Jaegers of D.A. Davidson also downgraded the stock to "underperform" from "neutral."
"Management's surprise dividend cut contradicts its rosy outlook for revenues and reflects the downward course of longer term cash flow, and the need to continue to invest $2.8-$3 billion per year to try to defend its shrinking wireline franchises," Jaegers said in a research note.
Nomura analyst Mike McCormack downgraded the stock to "reduce" from "buy", noting that CenturyLink's home phone and internet business is under pressure as is enterprise and wholesale revenue.
"With a limited fiber-based consumer business, the company is likely to come under increasing pressure from competitors as speed demands increase," McCormack said. "Like peers, CenturyLink is facing an enterprise and wholesale revenue growth headwind that we expect to continue for the foreseeable future."
McCormack said Windstream may have to follow CenturyLink's footsteps by cutting its dividend. However, Jaegers said she expects Windstream to keep its dividend intact.
Ratings agency Fitch downgraded its credit rating for the company after the dividend news. CenturyLink also announced quarterly earnings and revenue that were lower than Wall Street expected.
On top of the dividend cut, the Communications Workers of America labor union said its board authorized it to set a strike date for 13,000 CenturyLink workers, from the former Qwest Communications, out of its 46,500 work force.
CWA, which has been negotiating for a new contract since August, said had yet to set a date for a strike.
CenturyLink shares closed down $9.42 or 22.59 percent to $32.27 on the New York Stock Exchange after the news.
Reporting By Sinead Carew; Editing by Kenneth Barry and Chizu Nomiyama