Investors have long associated the telecommunications sector with generous dividend payments. But with a growing list of smaller operators trimming or eliminating their dividends in recent years, analysts say that association may be a thing of the past.
CenturyLink Inc., which provides legacy phone and internet services as well as fiber options, recently became the latest telco to slash its dividend, moving to lower its annual dividend to $1.00 from $2.16, beginning with the next distribution. The decision came roughly one year after Frontier Communications Corp.'s board suspended the quarterly cash dividend on the company's common stock, and less than two years after Windstream Communications Inc. similarly eliminated its dividend.
By contrast, AT&T Inc. and Verizon Communications Inc. both recently reiterated their commitments to maintaining and even increasing their dividends. But analysts say the two telco giants have now become the exception rather than the rule in the telecommunications sector.
The divide
"There absolutely is a divide," Gary Kim, an independent industry analyst covering the telecom business, said about the increasing difference between the two largest telco players and everybody else.
"Safe, steady dividend growth does not seem sustainable for most service providers going forward. Most firms in the communications space already have abandoned that approach," Kim said in an interview.
Brett Owens, chief investment strategist at the financial research and advisory firm Contrarian Outlook, agreed, saying that the broader association between the telecom sector and dividends is now "gone."
"For investors looking for stability in that sector, I think it's down to Verizon and AT&T," Owens said.
Top priority for Verizon, AT&T
During their most recent earnings calls, executives from AT&T and Verizon both listed dividends as among their top priorities for their companies.
Verizon CFO Matthew Ellis, for instance, said Verizon's first priority was investing in the Verizon network, especially as the company deploys next-generation 5G wireless services and more fiber.
"The second priority is the dividend. We know that's important to investors. The board has increased the dividend for the past 12 years. And as we do our jobs right as the management team, we put them in a position to continue that trend," Ellis said during Verizon's February investor day.
Similarly, AT&T CFO John Stephens recently said that while reducing the company's overall leverage is a primary focus in 2019, "Equally important to us is our ability to pay a strong dividend. Investors expect one from us." Stephens noted that AT&T has paid a "solid dividend" since 1983 when it became a stand-alone company.
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In December 2018, AT&T's board increased the company's quarterly dividend by a penny to 51 cents per share, effective in the first quarter of 2019. AT&T's dividend increase followed on the heels of one from Verizon in September 2018, where the company's board increased the quarterly dividend to 60.25 cents per share from 59 cents per share.
Verizon paid total dividends of $9.77 billion in 2018, up from $9.47 billion in 2017, and ended the year with a fourth-quarter dividend yield of 4.3%. The dividend yield is calculated as the regular cash dividends paid on the common stock during the period as a percent of the common stock price. AT&T's 2018 dividend payments totaled $13.41 billion, up from $12.04 billion a year earlier, and it ended the last three months of 2018 with a dividend yield of 7.0%.
Sustainability
Prior to its dividend cut, CenturyLink's dividend yield was 14.3% as of the fourth quarter of 2018, more than twice that of AT&T's. But Owens said it had long been clear CenturyLink's dividend was not sustainable, noting, "CenturyLink's top line was in decline for years."
CenturyLink executives said cutting the dividend was necessary to enable the company to lower debt while investing in new technologies.
"This is not something we did lightly, but it is something we firmly believe is in the best long-term interest of our shareholders," CenturyLink CEO and President Jeffrey Storey said during the company's recent earnings conference call.
As for AT&T and Verizon and whether the two companies will be able to sustain their dividends into the future, Kim is optimistic but noted it will require the companies to keep innovating and pushing into new revenue streams.
"The few big telcos might well be able to survive as low-growth dividend payers so long as they solve the problem of discovering or creating enough new revenue to more than displace half their current revenues every decade," he said. "They have done so before — long distance replaced by mobile. The next big challenge is what comes after mobile."
