Small Telcos And Their Dividends: Part 2

by: Philip Mause

This series deals with relatively small telecommunications companies and focuses on the sustainability of their dividends. The first article dealt with the larger of these companies. This article deals with the smaller companies within the group.

As I have researched this, a few points have begun to jump out at me. First of all, although there has been consolidation, there is still a considerable amount of ongoing takeover activity within the sector. This makes annual numbers a bit confusing because a given year can include some months before a merger and some months after a merger has been completed. There are also some one-time transitional costs associated with these transactions. As the industry moves away from traditional telephone service (I just saw a movie in which one actor has the line - "Can you find a payphone ANYWHERE now??) - there will be considerable capital expenditures and these may not continue forever. It is thus difficult to project the long-term trend of cash flow and investors should constantly review quarterly numbers to determine whether new patterns are emerging.

As noted in the first article, my methodology is a bit different from what is considered the norm. I make relatively few adjustments to income to derive sustainable owner cash flow - I generally just add back in depreciation and amortization and subtract capital expenditures. This tends to produce lower cash flow numbers than you will find in some other sources but I believe it gives the best picture of sustainable owner cash for the purpose of looking at the continued viability of dividends.

For Consolidated Communications (NASDAQ:CNSL), Shenandoah Telecommunications (NASDAQ:SHEN), NTELOS Holdings (NASDAQ:NTLS), Fairpoint Communications (NASDAQ:FRP), Hickory Technology (OTCPK:HTCO), Alaska Communications (NASDAQ:ALSK), and Alteva (NYSEMKT:ALTV), I am providing Wednesday's closing price, the current dividend yield, market cap, annual dividend expense, cash flow, and net debt. Price is based on data from Yahoo Financial. The other data is derived from recent SEC filings. In many cases, I have calculated full-year estimates by multiplying results from nine months of 2012 by 4/3.

Price Market Cap Yield Dividend Expense Cash Flow Net Debt
CNSL $16.75 $689M 9.2% $62M $29M $1.1B
SHEN $14.28 $342M 2.2% $8M -$6M $130M
FRP $8.37 $220M 0 0 $79M $937M
HTCO $9.45 $128M 6.0% $7.6M $6M $124M
ALSK $1.76 $80M 0 0 $15M $9M
ALTV $10.96 $62M 9.6% $6M -$1.9M $9M
NTLS $13.45 $281M 12.4% $34M $20M $392M

As can be seen and as was true of the first group of stocks in this sector, these companies tend to carry quite a bit of debt. They also have large asset bases on their balances sheets and generate a lot of depreciation. However, capital expenditures are also very large. For this reason, "income" can be a less important number than cash flow.

CNSL is the largest of the group. It made a large acquisition (SureWest) in 2012 and so its full-year numbers are a bit confusing. It has a wireless partnership arrangement with Verizon Wireless so it has some exposure to that sector of the industry. In its most recent quarter broadband accounted for 73% of revenue so traditional wireline service is becoming less important to the company.

SHEN, usually called Sheltel, serves the Shenandoah Valley including parts of Virginia, Maryland, and Pennsylvania. It has an affiliate agreement with Sprint (NYSE:S), which gives it exposure to the wireless sector. The region it serves may see some expansion in the form of second homes and even long-distance commuter residences generated by the Washington Metropolitan Area (my wife teaches in Fairfax County and some of the teachers come in from at least this far away). Demographic growth is a big plus because it can add revenue without adding equivalent capital expenditures.

FRP is an unusual stock in the group in that it doesn't pay dividends. It serves Northern New England and seems to have a strong market position there. It has been using cash flow to pay down debt and seems to be making progress in that direction. It could begin dividends at some point and that might lead the stock to pop.

NTLS is a wireless company providing both retail service and wholesale service through an arrangement with S. It serves Tennessee, Virginia, West Virginia, and contiguous states. Given the consolidation in the wireless industry, is a potential takeover target.

The smaller players, HTCO, ALSK, and ALTV are regionally oriented - respectively in Minnesota and Iowa, Alaska, and Illinois, Texas, and Pennsylvania.

Each of the companies in this group is a potential takeover target for one of the bigger companies. There has been a pattern of consolidation in the industry although takeovers are often accompanied by a spin off of unwanted assets and operations.

In reviewing all of the companies in both articles in the series, I have to say that I am not pounding the table in favor of any of them. They all participate in a declining business (traditional wireline service), which leads to revenue erosion. They all also are pushing into competitive business (broadband, wireless and business services), which require the deployment of considerable capital. They all have significant debt and face some threat of a cash squeeze, which would threaten dividends. I think that CTL is now priced at a reasonable level. WIN's management is definitely committed to its dividend but capital needs may compete for cash flow. FTR looks reasonable at this level too. FRP may pay down debt and gradually become more attractive.

I would not anchor my dividend portfolio with any of these stocks. A few of them may make sense as peripheral holdings, however. It may also make sense to return to this list when the market dips to see if bargains are available. Any investor in the group should watch quarterly financials to see how cash flow is doing and whether a dividend cut is threatened.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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