The benefits of dividend investing are well known.
Companies with high dividend yields can offer both protection and support in any market environment. In a falling market solid dividends can reduce a portfolio’s losses and in a rising market, such as today’s, a strong yield can be used to improve performance and offset inflation while interest rates are low.
The question is, can the largest dividend yields in the S&P 500 be considered safe and secure for investors who are seeking to protect their portfolio or enhance returns with high yield stocks.
Let’s examine that.
The highest yields
| Company | P/E | Dividend yield | EPS | DPS | Payout Ratio |
|---|---|---|---|---|---|
| Windstream Corporation (NASDAQ:WIN) | 30.6 | 12.1% | $0.27 | $1 | 370% |
| Frontier Communications Corp (NASDAQ:FTR) | 26.6 | 9.4% | $0.16 | $0.4 | 250% |
| CenturyLink, Inc. (NYSE:CTL) | 25.7 | 6% | $1.41 | $2.16 | 153% |
Windstream has the highest yield in the S&P 500 followed closely by Frontier and then CenturyLink. Although, at first glance, none of the three companies above are able to cover their payouts with earnings but how do their cash flows look?
Windstream
| Metric | Q2 2012 | Q3 2012 | Q4 2012 | Q1 2013 |
|---|---|---|---|---|
| Net Operating Cash Flow | $398 | $406.8 | $534 | $304.6 |
| Net Investing Cash Flow | $287.6 | $342.6 | $295.8 | $234.5 |
| Cash Available for Financing Activities | $110.4 | $64.2 | $238.2 | $70.1 |
| Dividends Paid | $147 | $147 | $147.5 | $148.1 |
| Change in Capital Stock | $0 | $0 | $0 | $0 |
| Issuance/(Reduction) of Debt | $15.3 | $148.4 | ($75.7) | $6.5 |
| Free Cash Flow | -$50.8 | -$78.5 | $163.5 | -$87 |
| Dividend Cover from Cash Available for Financing Activities | 0.8x | 0.4x | 1.6x | 0.5x |
Figures in $US millions. Financing activities include dividend payouts, changes in capital stock and the movement of debt.
Windstream Corporation (NASDAQ:WIN) provides offers managed cloud computing services to businesses as well as the provision of broadband, voice and video services to residential, mainly rural customers.
Yielding 12.1% the company’s payout is around the same as many highly leverage mREITs and, as a result the yield is highly suspect. Indeed, as shown above, the company is not able to cover its dividend payout with its earnings-per-share.
The company’s cash flows reinforce the fact the company is indeed paying out more than it can afford. For the last four quarters, Windstream has only been able to cover its dividend payout once with its available cash flow, (after the deduction of investing activities).
During Q4 of 2012, Windstream Corporation (NASDAQ:WIN) was able to cover its payouts to shareholders but that has been the only quarter out of the last four where this has been the case. Indeed, during the other three quarter shown above the company has not been able to cover its payouts and has had to rely on borrowing in order to support payouts – which is not sustainable.
So, based on Windstream Corporation (NASDAQ:WIN)’s borrowing and lack of dividend cover I believe that the payout is unsafe and could be at risk of being cut in the near future.
Verdict: unsafe
Frontier Communications
| Metric | Q2 2012 | Q3 2012 | Q4 2012 | Q1 2013 |
|---|---|---|---|---|
| Net Operating Cash Flow | $375.3 | $402.5 | $392.2 | $359.3 |
| Net Investing Cash Flow | $152.3 | $150.6 | $107.3 | $184.3 |
| Cash Available for Financing Activities | $222.7 | $251.9 | $284.9 | $175 |
| Dividends Paid | $100 | $100 | $100 | $100 |
| Change in Capital Stock | $0 | $0 | $0 | $0 |
| Issuance/(Reduction) of Debt | ($574) | $605 | ($2.2) | ($517) |
| Free Cash Flow | $89.5 | $108 | $100.6 | $68.7 |
| Dividend Cover from Cash Available for Financing Activities | 2.2x | 2.5x | 2.8x | 1.7x |
Figures in $US Millions. Financing activities include dividend payouts, changes in capital stock and the movement of debt.
Frontier Communications Corp (NASDAQ:FTR) is a communications company involved in the provision voice, data and video services to commercial and residential customers.
Frontier has the second largest dividend yield in the S&P 500 at 9.4%. Unlike Windstream above, Frontier Communications Corp (NASDAQ:FTR) has been able to cover its dividend payout from operating cash flow for the last four quarters.
After the deduction of cash spent on investing activities, Frontier Communications Corp (NASDAQ:FTR) has been able to cover its payout on average 2.3 times from cash available. In addition, the company has been buying back debt as its strong free cash flow has allowed the company to build a solid cash balance with which it can improve its financial position.
So, based on Frontier Communications Corp (NASDAQ:FTR)’s dividend cover of more than two times I believe that the company’s payout is safe and is at no risk of being cut in the near future.
Verdict: safe
CenturyLink, Inc. (NYSE:CTL)
| Metric | Q2 2012 | Q3 2012 | Q4 2012 | Q1 2013 |
|---|---|---|---|---|
| Net Operating Cash Flow | $1220 | $1890 | $1380 | $1390 |
| Net Investing Cash Flow | $512 | $688 | $827 | $584 |
| Cash Available for Financing Activities | $708 | $1202 | $553 | $806 |
| Dividends Paid | $453 | $452 | $454 | $341 |
| Change in Capital Stock | $0 | $0 | $0 | -$384 |
| Issuance/Reduction of Debt | ($1200) | ($867) | ($396) | $187 |
| Free Cash Flow | $136 | $716 | $30 | $383 |
| Dividend Cover from Cash Available for Financing Activities | 1.6x | 2.7x | 1.2x | 2.4x |
Figures in $US Millions. Financing activities include dividend payouts, changes in capital stock and the movement of debt.
The last company on the list is CenturyLink, Inc. (NYSE:CTL), which has cut its payout recently to focus on repurchasing stock as an alternative method of improving shareholder returns.
The company provides a range of communications services including local and long-distance broadband networks, data, managed hosting (including cloud hosting), Wireless and video services.
However, it would appear that the company had almost no need to lower its dividend payout as for the last three quarters of 2012, before the payout was reduced, the company’s average dividend cover from operating cash flow (after the deduction of investing activities) was, on average 1.9 times – leaving plenty of room for manoeuvrability.
Moreover, CenturyLink, Inc. (NYSE:CTL)’s payout has been so well covered during the last four quarters that the company has had cash available to reduce debt.
So, based on CenturyLink’s new reduced payout, which is covered more than twice by operating cash flow after the deduction of investing activities, I believe CenturyLink, Inc. (NYSE:CTL)’s dividend is safe.
Verdict: safe
Conclusion
These three stocks offer the highest yields in the S&P 500, however, I believe that only CenturyLink’s and Frontier’s dividends are safe and well covered by cash flows. On the other hand, Windstream Corporation (NASDAQ:WIN)’s payout looks shaky and investors should be wary.
Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article How Safe are the Three Largest Dividend Yields in the S&P 500? originally appeared on Fool.com.
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