Who’s Paying Out More Cash in Dividends than Anyone in the S&P 500? — Alpha Bulldogs

I’m sure many of you have seen the “Alpha Bulldogs” ad for Martin Hutchinson’s Permanent Wealth Investor newsletter — the marketing for this one is everywhere, and the ad letters are filled with promise for those who need some income and safety. Hutchinson claims that he only recommends “Alpha Bulldogs that are already legally required to make their next cash payment.”

And there are more requirements for these “Alpha Bulldog” picks, apparently — they have to have long unbroken streaks of returning cash to shareholders, analysis is based on current operations, not projections, and they have to be thriving in the current market conditions, etc. All stuff most folks would agree with …

… and although this is an expensive newsletter for one with an income focus (it’s about $800/year at the current “discount”), they also apparently get into somewhat more esoteric investments than just high dividend stocks, including covered call options selling, convertible bonds, and corporate and government debt. So the purview, at least, is fairly broad.

I haven’t written about this service before because they haven’t had any specific companies or investments teased in the ads, they’ve just been claiming past successes and making oft-cited points about the importance of dividends, compounding, and real cash returns. Not so exciting.

Lately, however, the ads have started to hype one particular stock, so I thought I should take a look. The stock teaser is not even in the full Alpha Bulldogs ads that I’ve seen, but it’s cited in the “introduction” to these ads by various editors and publishers who are sending the ad out to their mailing lists. Here’s how it was teased by Alexander Wissel at Investment U:

“Money Morning editor Martin Hutchinson has all the details on a company about to have a near-monopoly in the telecom industry… and he’s told us it could hand investors $400 to $2,400 in guaranteed cash payouts in the next 30 days.

“But your opportunity to get all the details – in a special subscriber-only conference call to be held on Tuesday, June 2 – ends Saturday at midnight. See Martin’s report below.”

And to see if I could get some more detail, I snooped around for other versions of this email. Here’s how it was introduced by Mike Ward at Money Morning:

“There’s one company right now that’s quietly becoming the largest telecom company of its kind. With its “under the radar” acquisition of a huge piece of Verizon, it’s about to “own” more DSL, mobile and landline services than any of its peers.

“Martin Hutchinson has the full report on this little-known company. And get this… It’s paying out more cash in dividends than any of the 500 stocks on the S&P. Its annual rate of return has been a whopping 24.5% – enough to double your money in a little over 3 years.

“And that’s without the acquisition and its exploding market share.

“This is a rare needle in a haystack. What’s even better is that readers who take advantage of it by May 30 could collect sizeable cash payouts in the next 30 days, anywhere from $400 to $2,400 depending on your style. And those payouts are guaranteed.

“Martin will be releasing the data on this company in an upcoming conference call. But again, the deadline is this Saturday, May 30.”

Now, I regret to tell you that, yes, Hutchinson’s deadline has passed (though the website sure looks like it’s still taking orders) … but that’s OK, we wouldn’t sign up for a newsletter just to find out the name of one lil’ ol’ stock, would we? No, that’s what the Gumshoe is for. This telecom firm almost has to be …

Frontier Communications (FTR)

Frontier, which used to be called Citizens Communications and has been a favorite of income investors for a couple years, is a rural wireline phone/broadband provider that has been rolling up small local phone companies for years.

And yes, the company is on the verge of getting much, much bigger — the business will triple in size once they close their deal to buy about 5 million phone lines and a million broadband subscribers from Verizon (the deal was announced last Month), but it’s a stock deal so Verizon will end up owning about 2/3 of the new Frontier. And Frontier has been forced to come up with some cash, so they’re also cutting their dividend from $1 a year to 75 cents — which still leaves it as a very high-yield stock, with a prospective yield of almost exactly 10% at the current share price. Based on that $1 per share dividend, the folks at IndexArb note that Frontier is the highest payer in the S&P 500, though that’s in terms of percentage yield (it’s far from the biggest nominal dividend per share, or the largest cash distributor of the S&P).

You might, by the way, have heard about Verizon’s other fairly big divestment activity recently — but that was (and is) of some Alltel wireless assets by Verizon Wireless (which is a joint venture of Verizon and Vodafone), a divestment that was required by the Department of Justice to maintain competition in the marketplace. This is different, this is essentially a strategy-driven divestment as Verizon focuses on their wireless and broadband businesses and de-emphasizes local phone service and traditional landline customers.

For the current quarter Frontier’s dividend is still 25 cents, and the stock goes ex-dividend probably late this week (you apparently have to be a “holder of record” by June 9, and that takes a few days after a trade — check this carefully if it’s important to you, I didn’t), so perhaps that’s part of the “urgency” of the pitch and the reason for Hutchinson’s timing of his secret conference call tomorrow. What I can’t tell for sure, from these extremely limited clues, is whether Hutchinson would want you to buy Frontier shares, or debt, or do some sort of covered call transaction (the premiums are very low, options investors seem to expect — rightly or wrongly, I don’t know — that the returns for investors will come primarily in the form of dividends this year). Frontier does have a lot of corporate debt available, too, with yields mostly ranging from 8-12%, so fairly similar to the current stock dividend yield (though the stock dividend, as we’ve seen, can be cut at will). I don’t know of any publicly traded preferred or convertible offerings, though there is a Merrill Lynch-created exchange traded bond trust that has a similar yield (ticker: PIY).

If you’re interested in learning more about the deal, which looks like it will end up cutting their overall debt levels in relation to sales, and maybe increasing cash flow (thanks in part to the fact that the deal was done with stock), they’ve had a couple recent investor presentations at conferences, and they have some good basic outlines of the deal on their website here.

Frontier has a reputation for being a strong cost-cutter and integrator, and for maintaining profitability in an environment where price sensitivity and competition seems to be growing, but they’ll also probably have to invest pretty heavily in what some folks say are neglected Verizon lines in rural areas, so I have no idea what the long-term picture will be for them. They are likely to continue seeing the same kind of subscriber losses as most other landline providers, I imagine, and they do depend on those high-margin customers and on rural coverage subsidies from the government and access fees paid by long distance providers, so there’s plenty of room for uncertainty about their business model over the very long term — especially if anything really strong is developed in wireless broadband that further erodes their competitive positioning. Still, as with many older technologies and businesses that are still quite profitable, the tendency is probably for urban investors who have dropped their landlines, use internet telephony, or are accustomed to ubiquitous broadband and 3G or 4G wireless to overstate the risks to Frontier’s business model.

I own shares of Verizon, and from that perspective I like the fact that Verizon has in recent years done a lot of this kind of divestment in order to focus on their core business areas, particularly on their FiOS rollouts that are focused on urban and suburban markets. But that doesn’t mean there won’t continue to be a profitable business in delivering telecommunications services to other parts of the country.

I suppose it’s still fair to say that Frontier has a near monopoly on many of the rural areas they cover, places where there isn’t a cable company (or other) alternative to the traditional landline phone service or broadband … and they will be the biggest company of their kind, or, as they call it, the “nation’s largest pure rural communications services provider.” Say that one three times fast, I dare you.

So … personally, if I were interested in income and liked Frontier, I’d probably just go with the plain ‘ol common stock, in part because they seem committed to the new lowered dividend — but since I’ve already told you I own Verizon, you probably can guess that I prefer those shares at the moment. What do you think? Let us know with a comment below.

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9 Comments on "Who’s Paying Out More Cash in Dividends than Anyone in the S&P 500? — Alpha Bulldogs"

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SageNot
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SageNot
June 1, 2009 1:00 pm

Neil George (of Personal Finance) reco’d this company over 2yrs ago & it’s down about 50% since then. They’ve evidently cut their dividend, & there’s talk of Verizon buying/selling more shares (but that w/b bullish to me.) MWE pays more & has a much lower PE last time I looked.

http://finance.yahoo.com/q/ta?t=1y&s=MWE&l=on&z=m&q=l&c=ftr

Dusty
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Dusty
June 1, 2009 1:16 pm
Thank you, Gumshoe, for an excelent review of this teaser. I own some other small telecoms gathered from suggestions in other sources. The phrase “virtual monopoly” would apply to most of these smaller telecoms since they all operate with regulated service areas and the “competition” is satellite service that seems to have its own troubles, technical and via regulation. My money says “Why not just do the most rational thing and go with Verizon and AT&T?” If the Markets see a big drop late in the year or over the next year or two, and they should, then wait for… Read more »
nasus
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nasus
June 4, 2009 11:58 pm

Thank you all for the excellent information and reveiw. As a side note, Porter Stansberry has recently mentioned Verizon as one of the best stocks to own right now.

Wayne Minardi
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Wayne Minardi
June 17, 2009 11:35 am

Per Frontier press release…Div cut after closing to “…provide $ for required maint/upgrade to OSP in acquired properties…”.

Lee
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Lee
May 18, 2011 4:33 pm
I subscribed to Permanent Wealth yesterday [May17, 2011]. After reading down the pttch the deal was one year for $695– a "$1300 savings" off the normal rate. However after clicking on the "payment page the rate was "$895. a $1100 savings" off the regular rate. That should have been a warning to me. Instead of filling out my credit card info, I I called the phone number listed for them and advised the sales person, "Scott" of this discrepancy. He said that he had had a similar complaint earlier and would honor the $695 price if I ordered over the… Read more »
Gravity Switch
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June 1, 2009 1:08 pm

True, though MWE is certainly a very different business (midstream MLP). The dividend cut was announced, but I don’t know when it goes into effect (after the transaction, or after this dividend? The transaction will probably take a year or so to close). I remember the old Motley Fool income folks touting Frontier/Citizens a few years back, too, it was (and is, I guess) a popular income stock.

SageNot
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SageNot
June 1, 2009 1:44 pm

OK TRavis, I thought that the original goal was the income generation in this industry. For the last 2yrs, none of these guys grew, so those paying higher dividends beat out VZ & T.

http://finance.yahoo.com/q/ta?s=VZ&t=2y&l=on&z=m&q=l&p=&a=&c=mwe,ftr,t

I’m pretty sure that I read somewhere that VZ has plans to either buy out or even blend FTR into it’s company, or am I mistaken?

Gravity Switch
Admin
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June 1, 2009 5:32 pm

VZ will own about 2/3 of FTR after the deal, I don’t know how long they plan to hold that stake. I like VZ’s growth potential much more, and the earnings power … they’ve paid out less in dividends, but cover their dividends better with earnings, and have the FiOS rollout and wireless business to provide unspectacular but still decent growth.

Gravity Switch
Admin
11
June 1, 2009 5:34 pm

I think that’s a decent track to take in this market — you can get a utility-like business plus potential growth with a better-than-most-utilities yield, in my opinion. High capital requirements and debt, but very solid earnings power.

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