by Travis Johnson, Stock Gumshoe | March 13, 2013 10:56 am
“…. the telecom industry had just recently taken a big hit. One of its industry leaders had just cut its dividend by 26%. The stock fell 23% in a single trading day.
“Panicked investors started selling – dragging down all stocks in this industry. It happens. And more frequently than I would like.
“So it was no surprise when a top CEO made this strong proclamation at its recent earnings conference call to soothe investor fears…
‘We support continuing to pay our dividend at its current rate.’ Good news!
“Especially when that stock is yielding a mouth-watering 11.8%!”
That’s the stock Roger Conrad[1] is teasing today for his Big Yield Hunting[2] newsletter, one of those $5/month services that have cropped up in recent years to bring in new subscribers … the newsletter generally looks for aggressive income stocks, picks that have unusually high yields — often because the market’s worried about something or the yield is seen by some as unsustainable.
We’ve covered a handful of Big Yield Hunting picks in the year or two that the service has existed — some up 40%, some down 40%, so as you might expect from a relatively aggressive stock picker they’re not all winners … but most are still paying pretty decent dividends[3], so let’s figure out which one he’s touting now and then you can check it out for yourself if you’re interested.
Here’s the spiel from Conrad that includes most of our clues for today:
“5 Reasons This 11.8% BIG YIELD is So Attractive
“To see if this CEO was on the level or just blowin’ smoke, I took a good, long look at this ‘yieldabeast.’
“First, I took a look at this telecom company’s historical stock price. I’ll admit it’s had its ups and downs. For example, the stock has traded north of $15 in February 2007, and south of $7 in March 2009. Then it was back up to $14.21 in December 2010… trending downward to a low of $8.18 in mid-November 2012. It’s closing in on $9 today.
“All the while – and to this day – it’s maintained its $0.25-per-share quarterly dividend. Buy 1,000 shares and you’re getting $1,000 a year in dividends.
“Second, I took a look at its growth rates. Basic phone service is less than a quarter of its revenue. Instead, most of its growth has occurred in the lucrative broadband business. That means its revenue is basically stable. And its free cash flow covers both dividends and capital spending by a healthy margin.
“Third, for a rural telecom company, this company has a coast-to-coast presence with nearly half a million business clients using 100,000 miles of fiber reaching big cities and small towns. Business and broadband revenue fueled an impressive 3.4% in the fourth quarter of 2012.
“Fourth, it has completely reorganized the company to streamline processes, improve efficiencies and lower costs.
“And finally, the company has significantly reduced debt.
“This all leads me to believe that the underlying business of this company is solid… and determined to maintain its dividend. So I believe the CEO was on the level about maintaining that generous dividend.”
So who are we being teased about here? Toss all that into the gaping maw of the Mighty, Mighty Thinkolator … and we learn that Conrad is touting: Windstream (WIN)[4]
Windstream was known as Alltel for most of the past 30+ years, a local telephone company serving mostly rural areas, and over that time they’ve changed names a couple times (they became Windstream in 2006) and expanded, buying up unwanted fixed lines and fiber networks from the big operators or acquiring small telecom companies around the country.
As has been true for fixed-line operations for most companies, they’re shrinking when it comes to telephone revenue — but growing revenue in high speed data and broadband. The goal, it seems, is to keep growing the broadband and data services businesses fast enough that it outpaces the cash flow drop from fixed-line telephony — and that seems to be working reasonably well, at least so far, though with a very large debt burden they do skate fairly close to the edge. They have enough capacity in their revolver loan to cover the only near term debt maturity, which is $800+ million in about six months, but there is a steady drumbeat of $1+ billion in debt coming due most years starting in 2016 or 2017.
WIN pays a lot of interest on that debt, and they have large depreciation charges thanks to the huge fixed networks they operate, but countering that is rising service revenue and a capital investment plan that seems to consistently have them investing less in the network than they book as depreciation charges — so that’s where the dividend comes from, they dividend out most of their free cash flow (more than 80% for last year, though they say that will drop to the 61-68% range for 2013). So it looks like that’s possibly manageable as long as cash flow doesn’t start declining significantly — even if, compared to their actual reported income, it looks like they’re paying out a lot more than they’re earning. That’s a common thread among capital-intensive telecom companies, who almost all pay out dividends that are higher than profits (WIN had actual earnings of 28 cents versus dividends of a dollar over the last year — that’s because depreciation comes out of reported income but isn’t an actual cash expense).
I wouldn’t count on WIN increasing its dividend anytime soon, but if business proceeds on this trajectory, as Conrad apparently thinks it can (and the company agrees, of course — they outline their transformation in an investor presentation here[5]), then they can probably keep paying out their dollar a year per share. The dividend has not changed in six years, so they’re anchoring themselves pretty tightly to that payout even during what were some tumultuous times for their stock.
The bigger question, probably, is whether you want to shoot for a 9-11% yield that will probably stay steady, at least for the coming year, or for a 4-5% yield that will almost certainly grow at a slow but steady clip. The former is represented by Windstream or their competitor Frontier Communications (FTR)[6], the latter would be any of a number of larger, more diversified fixed-and-wireless companies either in the US (Verizon, VZ or AT&T, T) or internationally (Vodafone, VOD). Over the past few years investors have been choosing the latter, particularly in the US, and driving up shares of VZ and T while WIN and FTR have generally seen share price declines. CenturyLink (CTL), another local telephone company turning itself into a broadband and data company after buying Qwest and Savvis in recent years, is somewhere in the middle — their dividend is higher than VZ and lower than WIN or FTR, and was also recently cut. That cut gives the warning sign for telecom investors in general — that “industry leader” quote at the beginning of today’s note is about them, it refers to the moment last month when CTL announced they would cut the dividend their shares instantly collapsed … so Roger Conrad is right to focus on whether or not WIN really can keep the dividend going, high-yield investors in general and telecom investors specifically are very focused on dividend yield.
So what do you think? Want to take a little chance on Windstream for that high current income yield? Let us know with a comment below.
Personal disclosure: I own shares of both Verizon and Vodafone. I won’t trade any of the stocks mentioned above for at least three days.
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What happens when interest rates go up?
Presumably, nothng good.
So ths would be as much a bet on stable interest rates going forward as it is on the underlying niche phone biz, right?
We have some clients that own pretty much all the above, except VOD (why their brokers didn’t buy that one, don’t know).
Frontier we suggested selling, and have occasionally looked at short term trades on WIN when it would go from the low 8’s up to the high 9’s.
Holding WIN until given some good reason to sell.
Roger
InvestLetters.com
Another stock whose prospects for growth is quite good and who pays a 4% dividend in INTC. I personally think the stock is worth over $35 pershare (recent valuation by DCF method) which is the reason I bought the stock and probably will by more.
It is tempting, but you seem to be hesitant….I checked online and found this comment ;
“analyst believes management’s policy on the dividend is not sustainable. The analyst warned the payout will be approaching 100 percent next year” which to me seems like two down arrows. Nice coverage on your part Gumshoe.
Intc is only $1 above its stock price in the late fall of 2009. Intc is a dead stock. Held it years ago and finally sold. It is not even a growth stock anymore.
It’s definitely not a growth stock and hasn’t been for quite a while, but with 7-10% earnings growth and 7-10% growth in the dividend, starting from a healthy 4%, I am delighted to own it. The possible earnings growth kicker that can happen as each new generation of smaller, better, faster chips is developed and Intel, presumably, continues to lead is a nice potential bonus, but it’s not required to own the stock. A 7% growth in share price and 7% increase in the dividend each year triples your holding in ten years. Assuming, of course, that the earnings consistency remains — that’s the key for long-term dividend growers and what I expect from Intel personally, but there’s always a judgement call even if the dividend growth history is much longer than Intel’s.
Unless you want to own that field in which Intel is, I would much rather own PM,MO,MCD,KO,Cl which have as large a dividend and stock price has appreciated quite a bit more than Intel.
True — lots of long-time dividend growers are out there as good candidates for the patient compounder.
As a Windstream subscriber I wish they would invest their earnings and comply with Pennsylvania law which requires uniform service state-wide. My DSL is slower than a whore going to church.
John, that is a good one. will have to remember that saying. lol.
I must agree with Mr. Saylor – I have been a gumshoe devotee for awhile and enjoy Travis’s exposes immensely. The ensuing comments are usually ok but boorish. John Chenosky’s comment above should be registered in the Comment Hall of Fame. If big yield is your shtick, take a looky look at DX or EFC. What say you Travis ??
Thanks Milt — I’m afraid I haven’t looked closely at the Mortgage REITs (or “Virtual banks” as Steve Sjuggerud calls them) for a long time, particularly the new ones that cropped up following the financial crisis. Don’t think I have even a passing awareness of those two.
I held WIN for years and was quite happy to pick up my $0.25 per quarter, year after year. However, I sold out back a bit (at a profit) because the whole thing just started to look too unsustainable to me. I decided to move my money to a dividend grower and I haven’t regretted my decision since. Just my 2 cents.
‘Robert says:
March 13, 2013 at 11:53 am
“What happens when interest rates go up?” ‘
I believe Robert asks an especially pertinent question (way up above) because (I at least believe) many central interest rates (like Home Mortgages for some) are artificially low right now with our Federal Reserve buying up extra large (mega) quantities of debt at ridiculously low rates (I will borrow all the money I can get my hands on at 1% per year, let alone much less than a measly 1%, such as is being paid by large financial lending, and borrowing, institutions – wouldn’t you!?) Point being that it is unsustainable, at some point in time reality will close in, even on our most powerful Federal Reserve, and interest rates will rise. For one, raising interest rates is how a Country/Nation Defends it’s currency – something our Federal Reserve is not interested in doing at the moment but if our (being well watered down) Federal Reserve Notes start to fall (Internationally) precipitously: Our Fed (or ‘we’) will face that hard choice: Watch our Currency go into Free Fall which means high high inflation/price increases OR defend our poor ailing Currency by raising interest rates and watch the Unemployment Rate soar (kinda like Spain’s is now) as Depression becomes even more pronounced. We, or our Federal Reserve, will get to pick which poison we want more of: Unemployment and a Great Depression like scenario or rapid price increases especially of food and fuel. Real nice choice! and yet that appears to be what we are looking at at some point in the future. Or, of course, balance the poisons evenly: more of both rather than even more of more of one side over the other (Inflation vs Unemployment – neither of which is particularly attractive).
At some point interest rates will rise. The bigger question is: when will they rise and by how much?
When interest rates rise: the better income/dividend yielders will go down in value. But, wait, there may be at least one exception to this! It is a Mark Skousen pic [and would totally love to get your take on it Travis 🙂 ]: EFT, Eaton Vance Floating Rate Income Trust which yields right around 6% these days. According to Mark Skousen (and 12 of his 14 pics, including income producers, were up in 2012, EFT BENEFITS(!) from rising short term interest rates). I take it that EFT, which return may not keep up with current price increases (which some smart analysts guesstimate at closer to 8% (over this past year) these days for things most of us use daily like food and fuel) but in there for income producers with what is supposed to be a sustainable 6% – EFT is supposed to go up (increase in market value as measured in U.S. Federal Reserve Notes) in value as interest rates do their inevitable (we all would love to know when the heavier rising will begin). Pretty Cool.
Would love to get your take, Travis, on EFT 🙂 Pretty good place to place at least a few or our, or my, ailing U.S. Federal Reserve Notes? And, as always, appreciate your diligence and excellent work . . .
The question of when interest rates will rise is one everyone has been asking for a few years now — and we’ve never gone through a period quite like this, with so much easing and an economy that’s still far from full strength, so it’s anyone’s guess how it plays out.
Dividend paying stocks, particularly those that are dividend raisers, significantly outperform their counterparts that don’t pay dividends even when inflation is high or interest rates are rising. That conclusion is from Ned Davis Research, which used data from roughly the last 30 years. You can see a nice summary of that (and some other dividend info) here: http://westwoodgroup.com/wp-content/uploads/2012/03/Myths-of-Dividend-Stocks.pdf
Also a good report from Goldman Sachs here: http://www.goldmansachs.com/gsam/docs/funds/commentary/white_paper/wp-145_dividend_growth.pdf
My general expectation is that if interest rates rise and inflation spikes, bond will obviously be very, very terrible investments while those resets take place — particularly longer-term bonds. Stocks will, on average, lose money. Dividend paying stocks, on average, will lose a lot less money than non-dividend payers. Floating rate and bank loan funds that reset much more frequently may well do fine, I don’t know what the history is for those assets during rising rate or inflationary times would be but I’d assume that they will do much better than “regular” bond funds.
Try finding risks and opportunities in fixed income As interest rates rise, the prices of bond holdings in funds will drop, the amount at risk tied to its benefits.
Travis, I just want to thank you and your fabulous Thinkolator. I find you quite entertaining, clever and informative. Whenever I get a mystery stock pitch, I try to detect the stock being pitched, but mostly, I end up back here with you and your Thinkolator for the correct answer. Thanks for your great site and interesting emails. Steve Brown
To all Gumshoer groupies – take a looky look at high yielding DX ( 10.8% ) and EFC ( 12.5% ) and feel to criticize/analyze. I’ve personally owned both for 2 years and done pretty well. Also consider TAXI. This company’s primary focus is to lend cab drivers money to buy the coveted medallions necessary for their livelihood. What a cool niche….
Company barely makes money ; has to issue debt to pay dividend is stretching payables to help cash conversion. Probably the scheme works until someone stops the music and Uncle Ben raises rates.. or the FCC changes rules on USF and these rural carriers don’t get the hand our from Uncle Sam.