This is a tricky market for income investors.
Bonds are selling at historically low yields and high prices. The
currently pays a miniscule 2.6% and a three-year CD pays about 1.8%
Meanwhile the S&P 500 had a huge run of about +80% from the
lows of March 2009 to April of this year. But the rally has since
sputtered. From here, the market looks questionable. The Federal
Reserve has more recently categorized the current
as "unusually uncertain."
With the future direction of the market especially hard to predict
and bonds selling at terrible valuations, where should investors be
How about dividends?
Historically, dividends have contributed nearly one-third of the
equity return of the S&P 500 since 1926. That percentage return
can be even higher in a flat or down market. And unlike bond
interest, dividends can stand up to
. This is because stocks can grow
in an inflationary environment and raise dividends. Bonds, however,
pay a fixed rate of interest that doesn't increase with inflation.
In fact, average
income from the S&P increased about +5% per year on average
since 1957, one percentage point ahead of inflation.
One of the best dividend sectors of the market has become telecom
stocks. While growth in the sector has slowed as a result of
wireless saturation and fierce competition, the steady stream of
dependable revenue generated by these companies make for great
In addition, the telecom business is relatively defensive. People
tend to cut back on other items before they reduce phone and
Internet usage. And a defensive, high paying industry is just what
the doctor ordered in this environment. Not all telecom operators
are the same, however. Companies need a strong market niche and a
Alaska Communications Systems Group (Nasdaq: ALSK)
, also known as ACS, is the largest diversified telecom provider
based in Alaska. The company offers local telephone, wireless, long
distance, data and Internet services to business and residential
customers throughout the state. It is also has the largest
next-generation (3G) wireless network in the state.
What's so great about Alaska?
Alaska may be cold, but its population is wealthy and growing.
According to ACS, Alaska has a median income +32% higher than the
national average, and people spend about +33% more on
communications services than other Americans. Population growth
already far exceeds the national average and could grow much more
in the next five or 10 years if proposed oil and gas development in
the state comes to fruition. As a further compliment to these
demographics, Alaska has a wireless penetration rate of just 67%,
compared to 84% for the United States.
ACS has grown its revenue +25% from 2004 to $346 million in 2009
and grown EBITDA +19% during the same period to $122 million. This
has resulted in a five-year average annual dividend growth rate of
+17%. Quarterly dividends have been $0.215 per share since the
first payment of 2006 and the annual $0.86 dividend translates to a
at current prices.
This high dividend looks solid going forward. ACS has maintained a
long term payout average of 70% to 75% of cash available for
distributions and guidance for 2010 forecast a below-average 67%
While Alaska is a great niche, ACS doesn't have the market all to
itself. Wireless competition greatly increased in 2007 when
bought Dobson Communications , ACS' only other wireless competitor.
ACS also has competition in the land line business, as
General Communication (Nasdaq: GNCMA)
has grabbed a sizable chunk of the Internet access business and
hastened ACS' land line losses.
As a result of increased competition, as well as a recessionary
economy, total revenue slipped -11% in 2009 from 2008. AT&T has
been luring away wireless customers with its exclusive offering of
the iPhone from
Apple (Nasdaq: AAPL)
, and ACS has also been forced to offer higher discounts to
That said, the future looks bright for ACS. As traditional wire
line business continues to shrink throughout the telecom industry
as more customers opt for wireless, ACS has transformed its
business. The wire line segment accounted for 75% of revenue in
2004, but accounted for just 26% in the second quarter of 2010,
while the growing wireless and enterprise segments increased from
25% of revenue in 2004 to 54% in the second quarter.
ACS has been leveraging its state-of-the-art 3G network to lure new
users and increase revenue per user with data services. Postpaid
wireless data per user increased by +15% in the second quarter over
the previous quarter to $10.77, as data revenue soared +52% from
the year ago quarter. ACS has also laid a new cable to the lower 48
states offering more bandwidth than the existing cables and
enabling the company to offer cutting-edge technology to
In the second quarter, overall company revenue fell just -1.6% from
the year ago period and operating cash flow increased +15% as a
result of cost costs. Going forward, ACS should grow cash flow in
the quarters and years ahead. The company had the best quarter in
its history for enterprise contracts sold and secured business that
will add $5 million in annual revenue. The company also purchased a
49% stake in TekMate Inc., the largest publically held IT firm in
the state .
ACS forecasts modestly higher profits in 2010 and above-average
dividend coverage. The company also said it is likely to upgrade
revenue projections, given the recent contracts and acquisition.
Action to Take -->
ACS pays a secure 9.6% yield in an uncertain market. The company
also has solid growth prospects going forward. Income-seekers
should consider buying the stock now, as its high
is likely to attract yield-hungry investors.
-- Tom Hutchinson
Tom has a 15-year history as a financial advisor with UBS
constructing investment portfolios. Tom's background includes a
NASD Series 7 and 63 certifications... Read more...
Disclosure: Neither Tom Hutchinson nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.