S&P affirms Embarq

Standard & Poor's said it affirmed its ratings on Embarq Corp., including its BBB- corporate credit rating, following the company's announcement that it was raising its common dividend by 25%.

The outlook is negative.

Although the higher dividend detracts marginally from credit quality, the agency said it expects Embarq to generate sufficient cash from operations to fund the higher dividend and anticipated capital expenditures and still generate discretionary cash flow for moderate debt repayment.

S&P added that the ratings on Embarq reflect the company's position as the dominant provider of local and long-distance telecom services in its markets, its solid operating margin, strong free cash flow characteristics, monthly recurring revenue from a sizable and geographically diverse customer base and good growth potential from digital subscriber line data services.

Important to the ratings is an intermediate financial risk profile incorporating S&P's expectations that Embarq will use a material portion of its discretionary cash flow for debt repayment to mitigate weak trends in its residential voice business, the agency noted.

Tempering factors include modestly declining revenue and cash flow due to advancing access-line erosion fueled by wireless substitution and cable telephony competition, as well as limited product diversity compared with cable competitors' broader and more-integrated bundle of services, S&P said.

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