Is Uniti Group’s Dividend Safe?

Uniti Group (NASDAQ:UNIT) is currently one of the highest-paying dividend stocks in the US stock market. With a yield of 12.4 percent, Uniti Group shares offer nearly eight times the 1.58 percent average yield of the S&P 500.

Such high yields, however, are often an indication of very high risk levels. With UNIT shares down nearly 31 percent over the past year, investors must ask themselves whether Uniti Group is an undervalued income vehicle or a value trap.

Here’s what you should know about Uniti Group, the safety of its dividend and whether the stock is an attractive buy at today’s prices.

 

First off, if you’re not familiar with what the company does, Uniti Group is a real estate investment trust (REIT) that specializes in fiber communications infrastructure.

It maintains some 139,000 route miles of fiber optic cable in a network that encompasses 300 cities throughout the United States.

Seems like a good business model so why is UNIT share price struggling?

Why Is Uniti Group Stock Falling?

The primary reason behind Uniti’s price collapse this year has been deteriorating earnings.

Uniti’s trailing 12-month EPS turned negative in mid-2022 and has declined steadily ever since. In Q3, the company reported a loss of $0.34 per share, largely due to a non-cash goodwill impairment.

2023 has also presented challenges for Uniti when it comes to sales growth. In Q3, the company’s top line increased by just 2.7 percent year-over-year.

Revenues have grown at an anemic pace since 2020, and no immediate catalyst appears on the horizon to suggest that Uniti will return to a period of higher growth.

Finally, the macroeconomic environment of the past year has generally put downward pressure on dividend stocks and particularly REITs.

With interest rates rising steadily, investors have been able to realize 4-5 percent returns on cash with very little downside risk. This has caused even very stable REITs to fall. Realty Income, for example, has seen its dividend yield spike to over 6 percent.

Is Uniti’s Dividend Safe?

Uniti’s dividend is in peril based on its exorbitantly high payout ratio and huge negative free cash flows. 

Each share of UNIT pays $0.60 per year, and the cash flow per share over the past year has been $2.64, so there is still opportunity for management to sustain the dividend for some time.

This gives Uniti enough coverage to maintain its current dividend for the present moment, though long-term overall losses could still pose a problem for the company.

Looking forward, analysts do expect Uniti Group to achieve slim profitability next year. With a cooling macroeconomic climate and sustained interest rate pressure, however, this is far from a guarantee.

Uniti Group may very well struggle to produce appreciable GAAP earnings for the foreseeable future, though its cash flows appear to be strong enough to cover its ongoing cash distributions.

On the negative side, the company is spending down its cash reserves, a fact which calls into question how long it can maintain its current dividend. At the end of 2022, Uniti had $43.8 million in cash and equivalents on hand. By the end of Q3, that reserve had dropped to just $34.1 million.

It’s also worth noting that Uniti has resorted to dividend cuts in the past to keep its finances in order. In Q1 of 2019, Uniti cut its quarterly dividend from $0.60 to $0.05, drastically reducing shareholder incomes.

It’s important to consider that this cut occurred almost a year before the 2020 era lockdowns. While many companies were forced to cut their dividends in 2020 and 2021, Uniti’s most drastic cut had nothing to do with pandemic-era pressures.

The fact that Uniti’s management has had to resort to substantial dividend cuts in the past may not do much to allay investor concerns. The lack of imminent dividend cuts also does not rule out the possibility that Uniti Group could be a value trap, which is a potentially larger risk to long-term shareholders.

Is Uniti Group a Value Trap?

At just 3.7 times times expected forward earnings and 1.1 times sales, Uniti Group may look appealing to value investors. There is some evidence, however, that the stock could be a classic value trap.

To begin with, the company’s earnings have regularly oscillated between periods of positivity and negativity since it went public in 2015. This lack of consistent profitability, particularly for a company that pays regular cash distributions, may make it a poor value choice.

Rising interest rates are also taking a toll on Uniti Group’s finances. In Q3, the company’s net interest expenses totaled $120.7 million, up from $97.7 million in the year-ago quarter.

While all indebted companies are contending with higher interest rates, Uniti Group’s interest coverage ratio of about 1.3 is low for a REIT, and its cash flows are far from sufficient to cover its nearly $5.5 billion in total debts.

Finally, investors should consider the steep losses UNIT shares have already accrued over the years. Uniti Group has lost over 80 percent of its market capitalization since its IPO.

Without a substantial growth catalyst on the near horizon, it’s entirely possible that this trend will ultimately continue as investors seek more reliable returns elsewhere. In light of Uniti’s uncertain profitability and financial health, the stock has the hallmarks of being a value trap.

It’s worth taking into account that there is also some slightly more bullish sentiment in the market for Uniti Group. The consensus rating on the stock is currently a Hold, and about 89 percent of the company is owned by institutional investors. Even under this rosier view, however, UNIT shares do not appear to be an attractive buy for new shareholders at the moment.

Ultimately, the value pitfalls surrounding Uniti Group could prove to be a larger problem than the immediate safety of its dividend. As attractive as double-digit yields can be, investors may do better by looking for lower yields in more stable REITs or other high-yield stocks.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.