Three Dividend Kings in the Technology Sector: Which is the Best Pick?

Published Wed, 09 Apr 2014 18:30 CET by

Investing in dividend stocks is never as straight forward as it may seem at times. There are key factors that an investor needs to consider before buying a stock that paid an enormous dividend to shareholders during the previous campaign. This report assesses three dividend kings with yields of at least 10% in the technology sector. It also identifies some factors crucial to choosing the best dividend stock regardless of the attractive dividend yields that some may boast.

Windstream Holdings
Windstream (Nasdaq: WIN) is a telecommunications service provider based in the U.S. The company provides communication and technology solutions to U.S customers. Some of its business involves the provision of managed services, cloud computing services and broadband, to businesses. Over the last five years, Windstream has maintained an annual dividend of $1.00, paid quarterly. The latest payment took place last month. Now, before jumping into believing that Windstream is your perfect dividend stock, it is expedient to look at the company’s ability to maintain the current dividend yield. Windstream’s fundamentals are discouraging, especially considering the fact that its dividend payout is pegged at 243.90%. This means that the company is giving back to shareholders more than it can organically generate. When it comes to dividend investing, the payout ratio is a key factor. Attractive payout rates would be preferably below 60%. Windstream boasts a dividend yield of 11.66%, based on the current stock price of $8.58.

Windstream Stock Price Graph
Another crucial element is the debt to equity ratio. High Debt/Equity ratio is likely to squeeze pretax profits, which in return affects earnings per share. The company could be forced to increase its payout ratio in order to maintain the prevailing dividend. Windstream appears to be having a high debt/equity ratio standing at 1,054x. Its quick ratio of 0.82 is also wanting as it gives the company little chance of managing its interest expense without floating another credit line.

VimpelCom (Nasdaq: VIP) is one of the world’s largest integrated telecommunications services operators. The company provides voice and data services through broadband, mobile and fixed technologies. VimpelCom’s dividend yield stands at 10.63% based on its current market price of $8.47. The stock has plunged massively in 2014, which is the reason behind its high dividend yield.
Unlike Windstream, VimpelCom’s dividend history has been rather volatile. In some periods, the shareholders enjoyed massive dividends, but had to forego payments in others. This is may not be an attractive characteristic for a dividend stock. Attractive dividend stocks are generally required to show some level of sustainability historically, in terms of dividend payments. It is clear that VimpelCom has not been able to meet this requirement over the last few years. Nevertheless, the company has managed to issue dividend payments in each of the last three years, which could be indicative of a new trend. The critical question though is whether the company’s fundamentals support that kind of outlook.
VimpelCom has a profit margin of about 4% for the trailing 12-months. This means that the company has been struggling to make profits over the last 12 months, something that does not support a positive outlook for a sustainable dividend. Additionally, the company’s towering debt of about $29B, compared to a cash balance of just $4.9b, means that a majority of its income is likely to go to debt repayment. Finally, the company’s current payout ratio stands at about 100%, which means all of its earnings have been paid out as dividends in the last few quarters. This, again, is well above the recommended maximum rate of 60%.

SouFun Holdings
China has been under the microscope over the recent past as it continues to struggle economically. However, SouFun (NYSE: SFUN), an internet information provider based in Beijing, seems to be swimming against the current. The company is paying a healthy dividend to its shareholders, yielding more than 1.41%, based on the current stock price of $13.65 per share.

SouFun Stock Price Graph
The company’s current dividend yield is achieved despite paying only 26% of its earnings. This means that there is enough margin of safety to cushion the company’s dividend rate against unforeseen fluctuations in earnings. The company has the ability to double its current dividend of $0.20 and still spare a commanding margin of safety.

Additionally, the company’s gross, operating and profit margins are impressive, standing at 83.90%, 55%, and 46.80%, respectively. These are critical to maintaining sustainable cash flows, which would then be issued to shareholders as dividends. The company has maintained a constant dividend over the last three years and implemented a stock split of 5:1 on April 7, 2014. This is the second time in just over three years, following the 4:1 split implemented in February 2011. Stock splits may sometime be a deterring factor for dividend investors when they happen frequently. SouFun’s earnings are expected to grow by 26.22% over the next five years. This is another confidence-boosting factor for dividend investors. The company’s debt to equity ratio stands at 1.4x, while its current ratio is pegged at 2.2x. These ratios indicate that the company is financially stable. SouFun has a forward price to earnings ratio of 2.45x while its PEG (price to earnings growth ratio) stands at an impressive 0.70x. This means that the company’s outlook is solid, and some massive growth could be on the way.

Some investors rush to purchase stocks that pay healthy dividends without taking a keen look at the fundamentals. It is paramount that an assessment of both past and future is done critically to establish the viability of a company as a dividend stock. In this case, SouFun seems to be the best of the three stocks, as it meets a majority of the characteristics of a credible dividend stock.