Bells take a hard look at dividends


When Bell Atlantic Corp. recently announced it would raise its quarterly dividend by a mere cent, it was a penny for its investors' thoughts.

The paltry 1.4 percent increase -- from 69 cents to 70 cents --

that its million shareholders will receive early next month was management's way of nudging investors to change the way they think about Bell Atlantic. But not too much and not too fast.

Generous dividends have long been sacrosanct in the telephone industry. Each year, with clockwork regularity, phone company executives have been expected to bestow a generous increase on the proverbial "widows and orphans" who value the predictability and security of utility stocks. Bell Atlantic Chairman Raymond Smith has publicly cited a reluctance to cut dividends as one of the reasons behind the collapse last year of his company's proposed merger with Tele-Communications Inc.

But now, with their monopoly status eroding and their need for investment capital increasing, the regional Bell operating companies (RBOCS) are looking on their sacred cow with a carnivorous gleam in their eyes. And industry analysts are watching the Bells' dividend policies as a sign of just how serious they are about making the transition from sheltered utilities to growth-oriented dynamos.

"It behooves the telcos [telephone companies] to start shaping shareholder expectation and preparing them for significant investment and increased competition and some drastic reshaping of traditional revenue expectations," said Mark Plakias, managing director of Strategic Telemedia in New York.

So far, the regional Bell operating companies have made only cautious moves in that direction. None has actually cut its dividend -- ever conscious of the legions of stockholders who still own the shares they received in the 1984 breakup of AT&T; and who still expect the "Baby Bells" to act with the stodgy predictability of their late Ma.

One of the Bells recently took a hard look at its dividend level -- and blinked. Despite a sky-high payout ratio of 80 percent of earnings and massive commitments to expensive capital projects, Pacific Telesis decided last month to keep its dividend at the current level.

Still, the entire group has moved to rein in the growth of the payout.

Bell Atlantic, for example, used to be much more generous to its stockholders. In the heady 1988-1991 period, it annually increased its quarterly dividend from 51 cents to 63 cents with three consecutive 4-cent jumps.

But in 1992, after a long recession stifled earnings, the Philadelphia-based phone company halved the increase to 2 cents. The economy recovered, but dividend growth didn't. It stayed at 2 cents until last week's further cutback.

While it has been a leader in the technological sphere, Bell Atlantic has lagged behind many of its peers in grappling with the dividend issue. Some have held their payouts flat for several years. Besides Bell Atlantic, only Chicago-based Ameritech and San Antonio-based SBC Communications Corp. have continued to increase dividends, according to a study by Tedd M. Alexander III, telecommunications analyst at Legg Mason.

Mr. Alexander said he expects the pressure on Bell company dividends to intensify. He is projecting the group's dividend payments as a percentage of earnings to drop from 75 percent in 1993 to 66 percent by 1996.

Cynthia Ciangio, a spokeswoman for Bell Atlantic, said the company's 1-cent dividend increase on its 436 million outstanding shares represents an "appropriate balance" between paying a competitive dividend and bringing its payout ratio down to about 60 percent. In 1994, that ratio stood at 78 percent -- making Bell Atlantic's dividend one of the more generous in the industry.

Ms. Ciangio said the company wants to cut its payout ratio in order to take advantage of the growth opportunities the company sees in the wireless, video and international areas.

But to executives in the cable television industry, which expects to vie with the phone companies for the same markets, the notion of a payout ratio as high as 60 percent is fantasy. Most cable companies don't pay a dividend.

Stephen Effros, president of the Cable Telecommunications Association, noted that the regional Bell companies have publicly committed themselves to billions of dollars of investments -- largely to replicate the architecture of the cable industry but also to create entire wireless networks for "personal communications services" (PCS).

"Something has certainly got to give, and certainly it could be the dividend," Mr. Effros said. "Operating telephone companies has been a world apart from the real business world for all these years. It's going to be a rude shock."

Mr. Alexander, however, said a reduction in dividends would only occur if cash flow is significantly impaired by competitive forces. And that won't happen overnight, he said.

"Five years from now, we could certainly have measurable competition in most segments of the telephone service industry," he said. "The rate of market share loss is going to be slow in the short term."

But August E. Grant, associate professor of mass communications at the University of Texas, said he believes it's inevitable that one of the RBOCs will take the plunge and actually cut its dividend before too long.

"The RBOCs are not going to be allowed to finance all of their entry into new business from cash flow," said Dr. Grant, citing regulatory concerns about the subsidizing of high-tech investments out of rate payers' bills.

He said that leaves either borrowing or the dividend as a source of investment capital. And of the two, cutting the dividend would be more logical, said Dr. Grant.

"One side of the market would react with shock, but on the other side it's a growth strategy," he said.

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