Home » Dividends are Great for Investors, a Challenge for Service Providers
When interest rates get as low as they currently are, the return on dividends can far exceed that of bonds, many financial advisers will note.
The domestic telecom sector is renowned for some of the highest yields on Wall Street. Even during the recent great recession, while many companies cut their dividend payments, most telecom firms did not, due to the stable revenues telecoms generate. Paragon Research points out that Windstream pays a 7.9 percent dividend, while AT&T has a 6.2 percent yield.
That points out a key business requirement for dividend-paying service providers, especially those firms paying dividends at those rates. If you consider that industry revenue basically has been flat for years, and you assume high payouts must continue to be made, other parts of the business must adjust. New revenues sources are important, over the long term. Near term, though, if revenue gains continue to be stubborn, there are just a few things firms can do.
They can try to cut their operating and capital expense, without in the process jeopardizing their ability to run their businesses. They can expand in adjacent territories and markets. Or they can buy growth in the form of acquisitions. Not all firms have the freedom to execute on all these strategies, but near-term growth has to be robust enough to support generous dividend payouts.
Given a low enough cost of capital, some firms will be able to grow simply by acquiring market share. But many can only cut costs or do “line extensions” to grab more customers in adjacent new markets. Healthy dividends are nice for investors, but are a sometimes excruciating management challenge for service providers.