The goal for many income investors is to find
high-yieldingstocks selling for bargain prices. After all, not only
is it possible to buy moreshares with lower-priced stocks, but they
have the potential to provide greater capital gains than
In this light, small-cap stocks are perfect. Known for sporting
nice yields of 3% or more and for their greaterupside potential,
dividend-paying small caps can really supercharge any
But small caps can also be risky. They are often too volatile
and have a greater chance ofdividend cuts.
I'm not really worried, though.
In the past five years, small caps have produced better gains
than the overallmarket , with the S&P 600 SmallCapIndex
returning almost double than the S&P 500's 4%.
After looking at the chart above, it's easy to see why small-cap
dividend payers can play a vital role in a well-diversified
With this in mind, here are two small dividend-paying telecom
companies investors should consider, despite their intrinsic
1. Cellcom Israel Ltd. (
Trailing yield: 12%
This member of theRussell 3000 Index provides one third of all
cellphone services in Israel.
The company has paid a stellar trailingdividend yield of more
than 12% in the past, attracting many investors seeking super high
yields. It also has a trailing price-to-earnings (P/E ) ratio of
almost 6 and aPEG ratio of 0.67 (A PEG ratio is also known as the
P/E-to-growth ratio. It determines astock 's value while
consideringearnings growth. So if the PEG ratio is one, then the
company is considered fairly valued. If it's below one, then the
company is consideredundervalued . A PEG ratio above one shows the
company isovervalued .)
Totalcash on hand of $4.29 per share and an expectedprofit of
nearly $4 per share this year just show how the company's metrics
are positive .
But before I continue, I need to share some bad news: The
company's 12% dividend has been shrinking at an annual rate of 7%
during the past five years. In addition, theboard of directors
announced in the third quarter of 2012, it had decided not to
distribute a dividend in order to get thebalance sheet back on
The company's existing infrastructure limits it to 3G service,
while the competition has upgraded to much faster 4G service. This
caused Cellcom's earnings to plunge 38% in the third quarter of
2012 to 32 cents a share, whilerevenue also fell 13% to a little
more than $370 million during the same period.
To add to the weakness, Cellcom acquired competitor NetVision in
2011, taking on $421 million of debt in the process. Since then,
the company's entirefree cash flow has been used to pay this debt.
The boardwill decide when to resume dividends on a
quarter-by-quarterbasis , effectively turning this once high payer
into yielding zero.
But despite these recent hurdles, Cellcom has launched
efficiency measures to match its reduced revenue. Free cash flow
has actually ramped up by 58% to $106 million in the third quarter
of 2012 compared with a year earlier.
It's important tonote that it's not just Cellcom that has been
struggling in Israel: Three other telecom companies that had led
this sector for more than 12 years are having to face a few
challenges, just like Cellcom. Federal changes in Israel in 2011
forced them to cut the fees they charged one another to connect
calls. The changes also required them to eliminate exit fines for
customers, which caused their revenue and earnings to slide across
That's not to mention aprice war that started in 2012, when six
new telecoms entered the marketoffering ultra-low rate
But I think there are some bright spots on the horizon.
Cellcom recently won a military contract and it's making plans
to enter the Internet TV business. Still, it may be a rough
fewquarters before this major Israeli telecom starts paying
Taking a look technically, Cellcom's price has dropped well
below its 200-day simplemoving average , eliminating the company
from my value zone pullback criteria (To ensure the uptrend is
still intact, the pullback must remain above the200-day moving
Despite its super high-yield, I only feel comfortable watching
Cellcom for now, before waiting for signs of an upward momentum to
2. USA Mobility (Nasdaq: USMO)
Trailing Yield: 5%
This little telecom provides wireless messaging as well as
mobile voice and data services to U.S. health care, government and
business markets. It has amarket cap of a little more than $240
million, apayout ratio of nearly 49% andnet margin of almost 20%.
The dividend yield is just under 5%. In the third quarter of
2012, USA Mobility reported revenue of a little more than $55
million, butGAAP reported sales were 10% lower than the same
quarter a year earlier. USA Mobility is estimating revenue of just
under $54 million and earnings of 37 cents per share in the fourth
quarter of 2012.
What I like about the company is that nearly 80% of the shares
are institutionally-owned. In addition, the price has just bounced
off of the50-day moving average -- indicating upward momentum. I
expect shares to be trading at $13 within the next year.
Risks to Consider:
As stated earlier, small-cap dividend-paying stocks have more
risks than higher-cap stocks. Wheninvesting in small-caps always be
prepared for substantial volatility and only usemoney you can
afford to lose.
Action to Take -- >
Along with the risk comes high potential reward. Cellcom Israel has
historically paid high dividends but it is currently suffering from
a lower share price due to the dividend cut. I think this company
may soon get back on the winning side, but I would wait for signs
of upward momentum prior to entering long. USA Mobility, on the
other hand, is exhibiting strength and is showing upward momentum,
so it's a compelling pick right now.