“Dividend Superstars: High Yield Rural Phone Company” Weiss Research

By Travis Johnson, Stock Gumshoe, August 1, 2008

It’s so sad when the markets drift lower and everyone’s paranoid — the promises dry up. I miss the days of the promised 1,500% gains from tiny oil explorers and mining microcaps, and the promised 900% gains from the next tech superstar … how’s a Gumshoe supposed to get excited about a 15-20% annual return?

But I suppose, in times of trouble, Mother Dividend comes to me, speaking words of wisdom, “cash in hand, cash in hand.”

And that’s what our friend Nilus Mattive (awesome name, eh?) is selling us with his new Dividend Superstars service from Weiss Research — a line on companies that pay high dividends that provide for much of their overall return.

I must admit to having a soft spot for dividends deep inside my cold, hard Gumshoe heart, so let’s look and see which ones Nilus thinks we should buy, shall we? After all, he did major in Theology, English and Philosophy at Scranton.

OK, that was just a friendly jab — he worked for S&P on their newsletters, so I’m sure we can stipulate that he’s a smart guy and knows the markets. And in the interests of fairness, the Gumshoe majored in government lo those many years ago when he trod the cold footpaths of an upstate NY university within a few hours of Scranton in his search for wisdom (and beer), and has never worked on Wall Street … or even considered an MBA.

But moving on, were we?

Nilus (did I mention that I love that name?) tells us about three special Dividend Superstars that we need to pick up right away — each one described in a special report that for some reason is valued at between $29-39. This Gumshoe writeup you’re reading right now, by the way — though totally free for you in this special limited time offer — is worth $18.43.

So let’s have a look at the three, shall we?

“Dividend Superstar #1: 10.1% Yield from a Rural Phone Company with Steady Revenues and a Huge Cash Nest-Egg”

This is all about a traditional telephone business — and these businesses, though generally considered to be in decline, do still make lots and lots of money off of capital investments that were, for the most part, made decades ago. That means buckets of free cash flow, and many landline telephone businesses pay good dividends (most of them are owned by the larger conglomerates, like Verizon and AT&T).

But this is one of a few rural telephone providers that is publicly traded and fairly large.

Here are Nilus’ clues:

“My favorite dividend-paying company in this space is proof positive: In the first quarter of 2008, it posted revenues of $105 million and profits of $49 million. Meanwhile, this company is busily selling other money-making services like high-speed Internet to its existing customers.

“The stock’s outsized dividend looks darn secure to me. The company has more than $34 million in cash that could be used for payments to shareholders.”

“… Bottom line: The stock’s annual yield is currently 10.1%, and as an extra bonus, I think the shares stand to increase substantially in price.”

So what are we dealing with here? I agree with Nilus that most of these kinds of companies are fairly steady, and that most of them are able to at least hold onto sales by upgrading people to DSL or similar add-on services that use their wires, though I don’t know that this automatically makes them good investments, even with a good dividend. Can the mighty Gumshoe Thinkolator make short work of these clues?

Indeed.

This is Consolidated Communications (CNSL)

And, to be clear, they didn’t have earnings of $49 million in the first quarter — that was EBITDA (earnings before interest, depreciation and amortization). They had cash flow of about $25 million in that quarter. Their revenue really was $105 million.

So this is a small rural telecom company — perhaps an acquisition target or an acquirer someday, since folks seem to think that this industry will continue to see consolidation (one of the bigger players, Citizens Communications, just merged with Frontier). It strikes me that this industry is all about stability — no one thinks they’re going to grow to any appreciable degree, but most poeple seem to think that they’re going to continue to generate a lot of cash and pay a decent dividend. The key for most of these folks is the extent to which new signups for broadband and other non-telephone services can make up for declining landline phone usage. So far, from a quick look at their filings, it looks like these guys are doing OK in that regard — they have some revenue growth still, but earnings are generally declining and the dividend is fairly stable. That can’t keep going forever, but for an old business that is slowly losing customers and not reinvesting too heavily they can probably continue to dividend out a lot of cash flow.

The dividend has been steady since 2005 at $1.55 a share, but do note that although that’s a current yield of better than 10%, the actual return on the stock has lagged the dividend because of a falling share price. Actual overall returns for the last three years, dividends included, would have been about 8% annually, and the company has fallen dramatically this year so the loss could be much greater if you had bought recently.

Essentially, what you see with companies like this is high leverage (debt is $800 million, market cap only $400 million), a heavy payout ratio (they paid out 72% of their “dividendable cash” last quarter, a number that was much higher than reported earnings), and a thirst for growth in IPTV and broadband subscriptions to make up for landline losses, but, in most cases, no signficiant promise for future earnings growth (analysts give this one a PEG ratio of 7, which is a wildly high number — this is not cheap on typical earnings valuation and growth metrics, it’s all about the dividend and free cash flow).

I haven’t looked at CNSL’s history, so I can just share those general thoughts on rural telecom. As to having enough cash on hand to support that dividend, that may be true as long as their cash flow remains OK (it probably should, usually the leak of landline customers is fairly slow, and they don’t reinvest all that much) — they do have more than $30 million in cash, which doesn’t strike me as that huge of a “nest egg” compared to their $800 million in debt … but you can call it as you see it.

Oh, and they report earnings next week — Thursday morning, so you’ll have a chance to look at some fresh numbers soon if you’re interested.

Superstars 2 and 3 coming shortly in a separate writeup … don’t worry, that rock-solid value of $18.43 will still be yours, free free free!

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19 Comments on "“Dividend Superstars: High Yield Rural Phone Company” Weiss Research"

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Harold Zeckel
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Harold Zeckel
August 2, 2008 10:29 am

Things I worry about when considering dividend stocks: How long has the company been paying dividends like that and CNSL has only been around since mid- 2005, and as with other dividend paying stocks, you have to really watch the price you buy the stock at. If you had bought CNSL at it’s top of around $22.60 per share, then the annual yield of $1.56 (that is for 2007) would give us an annual yield of 6.9%, which isn’t bad, but there are other stocks which have been around longer and yielded around 10% steadily.

Brian B.
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Brian B.
August 2, 2008 12:06 pm

I agree that the dividend sometimes pales in consideration of the price drop of the stock. CNSL at 13.98 is long due for a price stabilization period. The chart trend is starting to look Bullish, but I’ll wait till thursday for the earnings report. Telecom’s in general have been in a downtrend for help in putting it in perspective. Good Investing

milton
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milton
August 2, 2008 2:09 pm

A few years ago when I was disabled I allowed Martin Weiss to make my investments. He made 22 investments all of which were disasters and I quickly left his service. These did not further the cause of my recovery.

sniper
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sniper
August 2, 2008 6:10 pm

Milton,
I’ll be willing to bet you paid Martin Weiss a whole lot more than what the Gumshoe provides at a mere $50. per year if you want to become a Gumshoe
Irregular or get his advice for free. I am a Gumshoe Irregular on my office e-mail. Price is cheap at twice the price.
Good investing to all and a thank you to the Gumshoe once again

berenice
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berenice
August 2, 2008 6:43 pm

i read since a long time all those financial letters and i think that you guys from Gumshoe do a better job. i have read something called ’30 time better then the stock market’. it is about FOREX transactions. is anybody know something about this kind of investment?

Big Mo
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Big Mo
August 2, 2008 9:33 pm
Bernice, I’d skip the FOREX if I were you. It’s betting on currency exchange rates, dollar vs. euro, euro vs. yen, etc. There are lots of software programs being hyped right now through spam and other means that make some exorbitant claims, and will even provide the data to back it up. Problem is, these programs were designed against the historical data in the first place, so if you backtest them, say a year, yes, they will shows incredible gains. It’s the moving forward part that will get you in trouble. Also very highly leveraged so that a “pip” worth… Read more »
Susan
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Susan
August 3, 2008 6:36 am

I subscribe to Dividend Superstars and the stock he’s touting here is not Consolidated Communications, but Iowa Telecom. A glitch, perhaps in the ole Gumshoe Thinkolator? Or, am I missing something? So, how about an expose using the correct stock? BTW, I love your newsletter!

trader9
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trader9
August 3, 2008 11:51 am

Gumshoe,
I very much respect your acumen and greatly enjoy your rapier wit. Respectfully, I wish to correct the common mistake of using “off of,” as in, “lots of money off of capital investments.” “From” or even “off” should be used.

SageNot
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SageNot
August 3, 2008 12:02 pm

Susan, how long have you subscribed to Nilus Mattive’s dividend letter? Was it always $39./yr.? Carla Pasternack (Sp) used t/b $49./yr until she hooked up with a global pro & now their subscription costs hundreds of $$ for essentially the same advice.

T.I.A.!

SageNot

Robert
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Robert
August 3, 2008 12:58 pm

This is off the current topic but…
Has anybody out there used Trading Markets “Power Trades”? I’ve been with them now three months and the end results have not been that good. Some of the Power 9’s & 10’s make good money while others tank and cancel out the gains. Anybody else using them? and how?

Myron Martin
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Myron Martin
August 3, 2008 9:34 pm

Susan is right, the stock being touted is Iowa Telecom, so even the thinkolator can sometimes get it wrong, sorry about that Travis! Myron

Crazy B
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Crazy B
August 5, 2008 7:00 pm

The Oxford Club sent some flyers today and one of them was about somthing called”Secured Investment Contracts”.What are these baby’s?? Also this supplement came from Brian Hunt at S&A and something called True Income Investments. All of this is confusing to me but it will probably make sense to the Gumshoe and his readers.All of this in an Oxford Club Envelope.

Harold Zeckel
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Harold Zeckel
August 12, 2008 8:14 pm
He has been a bear for over 20 years. As a result, over the years of heeding his advice would have lost you a lot of money. Like the clock whose hands are standing still which is telling the correct time twice a day, Martin’s time eventually comes. He was right on when he predicted Lucent’s collapse. At the time Washington Mutual looked horrendous so I bought puts in it. I just lost money. If I had kept rolling them over for 4 or 5 years I would have made a tidy sum, but it took too much patience. Martin… Read more »
martinwiess iswrong
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martinwiess iswrong
June 13, 2010 6:34 am

look at ALSk for a new, seemingly steadfast dividend payer. I have owned and will repurchase but am a bit suspicious of the general market presently

spreadtrader
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spreadtrader
August 3, 2008 3:44 am

Unless you are an experienced, accomplished trader stay away from FOREX. You will lose money.

Suzanne Gerard
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Suzanne Gerard
August 5, 2008 8:56 am
You obviously have some grammatical pet peeves. I would like to air two of mine. 1) Is the lone preposition hanging onto the end of the sentence. i.e.”data to back it up” rather than “data to support it”. 2)the expression “have got”. i.e. ‘I have got 100 shares’ (not a quote). You either “have” it or you “got” it. These are two verbs, to have, and to get. Make up your minds, People. Do you ‘have it, or did you ‘get’ it? If you have it, use “I have”. If you have gotten it, use “I got”. Many thanks for… Read more »
Donato
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August 6, 2008 11:36 am
Your query regarding “secured investment contracts” sounded familiar, so I did a quick search and found your answer at the address below. As a bit of a side note, I used to know someone who subscribed to just the basic monthly Oxford news letter. He said he did ok with their stuff providing a couple of rules were followed. One, throw away everything else that comes with the news letter. And two, just pick one stock each month that is following a market trend and not overpriced. At the time, I was not in the market and didn’t know what… Read more »
Harold Zeckel
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Harold Zeckel
August 12, 2008 7:54 pm

Re: prepositions at the end of a sentence, Winston Churchill is quoted as saying, “That is something up with which I will not put!”

Butch
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Butch
August 31, 2008 8:47 pm

Susan, I’ve been with DS 2 months doing ok.
How long have you been with them & how are you doing ? Thanks

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