Sprint May Cut Its Dividend to Conserve Cash

Sprint Corp. may cut its dividend, among the highest in the telecommunications industry, to conserve cash as a decline in long-distance sales makes it harder to repay debt, investors said.

Sprint paid $226 million in dividends in the first half, three times its net income of $72 million in the same period. Its annual yield--the dividend as a percentage of share price--of 4.27% is the second-highest among its peers after that paid by Verizon Communications Inc., Bloomberg data show.

The third-largest U.S. long-distance phone company, buffeted by six quarters of sales declines at its main phone unit, may use that cash to help pay interest on debt totaling $20.3 billion at the end of June, investors said. Rival AT&T; Corp. cut its dividend in 2000, and WorldCom Inc. in July said it wouldn’t pay a dividend on shares that track its consumer unit.

Sprint “may have to reduce or eliminate the dividend,” said Paul Wright, an analyst at Loomis Sayles & Co. He said his firm is holding Sprint stock on speculation it will become a takeover target, and “not because of the dividend.”

Telecommunications companies, with historically stable revenue, often have paid higher dividends than companies in other industries. Those payments can help make stock alluring to investors when shares are down. Sprint’s stock has fallen 50% in the last year and Friday rose 96 cents to $11.71 in New York Stock Exchange composite trading.

Dividends paid by phone-service providers listed on the Standard & Poor’s 500 index offer an average yield of 3.5%. Those paid by packaged-food companies average 2.86% and those paid by oil companies have a 2.8% yield, according to Bloomberg data.

Sprint Chief Financial Officer Robert Dellinger said in an interview last month that he had no plans to cut the dividend and that the company has enough money to repay the $1.4 billion of debt coming due in the next 18 months.

Banks revised the terms of as much as $1.1 billion in loans, reducing the likelihood that Sprint will have to repay them early, the company said this month.

Although the moves bode well for Sprint now, Dellinger and Chief Executive William Esrey may choose down the road to trim the dividend to stave off a cash crunch, shareholders said.

“I can certainly see liquidity concerns producing cuts” to the dividend, said John Maloney, chief executive of M&R; Capital Management Inc., a holder of Sprint shares.

Sprint said in June that 2002 sales at its phone business would fall at a “mid-single-digit” percentage rate, instead of the “low-single-digit rate” previously forecast.

Standard & Poor’s in June also lowered its rating on Sprint debt by two levels to BBB-, the lowest investment grade, from BBB+.

Moody’s Investors Service in June downgraded Sprint’s debt to one level above junk, citing concern that the company may not generate enough cash to pay debts. Moody’s also lowered its outlook on Sprint to negative.

The $226 million in dividends that Sprint paid in the first half represents almost one-third of the company’s $699 million in interest payments in the same period, earnings statements show.

Sprint would have added incentive to reduce dividends in the event it falters in its efforts to sell the Yellow Pages directory unit, investors said. The company has said the sale could raise more than $2 billion after taxes.

Sprint rivals also are paying high dividends, luring some fund managers and investors. Verizon, the largest U.S. local telephone company, had a dividend yield of 4.86% during the last year. SBC Communications Inc.’s was 3.67%, and BellSouth Corp.’s was 2.99%.

Local-phone service providers are insulated from some of the pressures facing long-distance companies and are less likely to trim their dividends to save cash, investors said. Sprint and its peers have been forced to slash prices for long-distance calls as consumers rely more on e-mail and mobile phones and as businesses fire workers and spend less on phone services.

Dividends for companies such as Verizon, SBC and BellSouth “are very sustainable,” said Rick Franklin, an analyst at Banc of America Capital Management, owner of shares of all three companies. “Their balance sheets and cash flows are strong. The cushion for Sprint isn’t as great.”