As I've said many times before, investors can find plenty of
rich yields in telecom stocks. Predictable subscriber demand gives
these companies plenty ofcash flow to support high dividends. In
addition, telecom companies currently benefit from the rollout of
the 4G technology, which is exponentially expanding data usage.
yield doesn't necessarilymean high quality. Buying a stock based
on its yield alone is extremely risky. Just as you would never buy
a car without looking under the hood, you should never buy a stock
without evaluating all of its fundamentals. My closer look at the
highest-yielding telecom stocks revealed several potential values
and a few high-riskdividend traps.
Here they are...
Portugal Telecom (
, the largest telecom operator in Portugal has been hurt
by mandated rate reductions and southern Europe's deepening
financial crisis. The company recently posted third-quarter
profits 29% lower than last year at $83 million, and analysts
look for just 3% growth for each of the next five years.
Cash-flow coverage of the dividend was decent at 130%, but
Portugal Telecom has a massivedebt load totaling $14.6
billion, or six times cash flow. To be able to cut debt
faster, the company halved its dividend last June to an
annual rate of just 43 cents, which implies a forward yield
of about 8.5%.
The largest French telecom has lost 30% of itsmarket
value this year because of Europe's economic woes and
aprice war with a new mobile provider. The company's cash
flow dipped 7% in the third quarter to $4.8 billion, and
France Telecom (
is guiding for a further drop in cash flow totaling just $9
billion in 2013.
The good news is even with reduced cash flow, the
companywill still have plenty to cover the $5.6 billion
NTELOS Holding Corp.
NTELOS Holding Corp. (Nasdaq: NTLS)
provides high-speed voice and data services to subscribers in
the eastern and southeastern United States. Roughly 40% of
the company'srevenue comes from a wholesale wireless service
supplier agreement with Sprint. A major worry for investors
is that Sprint won't renew this contract when it expires in
NTELOS'earnings per share (
) from continuing operations dropped 30% in this year's third
quarter to 22 cents. Analysts anticipate no better than 3%
annualEPS growth in the next five years. While trailing
12-month cash flow of $100 million easily covers the $49
million dividend, NTELOS is weighted down by $451 million of
debt. Last year, this company reduced its annual dividend by
25% to $1.68 a share.
City Telecom (Nasdaq: CTEL)
has solid 12-month EPS of $12.18 and more cash than debt.
Clouding this otherwise rosy picture is the company's
recent sale of its telecom operations in order to become a
pure play in TV content.
Launching an entirely new business positions City
Telecom as a start-up, so the company plans to eliminate
its dividend altogether for three years so it can invest in
its TV operations.
Windstream (Nasdaq: WIN)
primarily operates in rural markets of the U.S. South and has
been very aggressive on theacquisition front. The company
acquired Iowa Telecom Services two years ago for $1.1 billion
and PAETEC Holding last year for $2.3 billion.
While Windstream'searnings fell 31% in the third quarter
to $54 million, the company expects to realize $40 million of
annual savings from a recent restructuring and another $100
million of acquisition-related operating synergies by
Analysts predict 20% EPS growth next year. In the past 12
months, Windstream has generated $581 million offree cash
flow and paid out $441 million in dividends. Debt is high at
$7.8 billion or 88% of capital, but is down from $8.9 billion
at the beginning of this year. Windstream has paid an annual
dividend of $1 per share for the past five years.
Cellcom Israel (
holds a one-third share of the Israelimarket , but is being
hurt by challenges from competitors that have already
upgraded to 4G networks. Cellcom is still limited to 3G
Because of that, Cellcom's EPS fell 38% in the third
quarter to 32 cents because of subscriber losses, and the
company expects further erosion next quarter as it takes
steps to adjust expenses to new lower revenue levels.
Cellcom took on $421 million of debt last year to acquire
Netvision and is using all of its cash flow for debt
reduction. The company stopped paying dividends twoquarters
ago and plans to evaluate future payments on a
Consolidated Communications Holdings
Consolidated Communications Holdings (Nasdaq:
provides high-speed Internet and broadband services to
customers in Western and Midwestern states. The company
recently paid $340.9 million for regional operator SureWest
and anticipates $25 million in annual operating synergies
as a result of themerger . Excluding acquisition-related
costs, the company's EPS improved 33% in the third quarter
to 28 cents.
While the acquisition also left Consolidated
withlong-term debt of $1.2 billion (roughly four times cash
flow), the company has restructured its debt so there are
no debtmaturities in the next five years. Cash-flow
coverage of the dividend is 140% and Consolidated has paid
a 39-cent quarterly dividend 20 quarters in a row.
Risks to Consider:
Foreign companies often tie dividend payout to earnings, which
can result in cuts in the dividend, even if the business still has
plenty of cash and cash flow. All of the foreign companies
described above have either cut or eliminated dividends altogether
in the past 12 months. U.S. companies are far less inclined to
slash the dividend even during tough times.
Action to Take -->
I wouldn't even consider owning a stock that misses dividend
payments such as Cellcom Israel or one totally revamping
itsbusiness model such as City Telecom. NTELOS is risky because of
its contract situation. Either of the European telecoms (France
Telecom and Portugal Telecom) may appeal to investors willing to
wait for Europe's economic recovery. These European telecom giants
aren't likely to disappear anytime soon, both continue to generate
plenty of cash flow and yields remain attractive even at the lower
With that said, my top picks for overall safety are Consolidated
Communications and Windstream. Both of these companies are gaining
synergies from recent acquisitions, have good cash flow coverage of
the dividend and are focused on reducing debt. Windstream trades at
a lower forward price-to-earnings (P/E ) ratio than Consolidated
(16 versus 21), which suggests Windstream may be a better