Whether Certain Telecommunication Stocks With Outsized Dividends Are Worth The Risk

by: Brian Gorban
Leaders in Dividend Yield
Alaska Communications Systems G (NASDAQ:ALSK) 11.70%
Frontier Communications Corpora (NYSE:FTR) 10.00%
Consolidated Communications Hol (NASDAQ:CNSL) 8.20%
CenturyLink, Inc. Common Stock (NYSE:CTL) 8.20%
Windstream Corporation (NASDAQ:WIN) 8.00%

Just a quick scan of Telecommunication ("Telecom") stocks show that they have some sizeable yields worth looking more into as the 10-year yield now hovers around a paltry 2% (yes, that means lending the U.S. government money for a full 10 years and only getting 2% annually). I don't know about you, but fuel, food, tuition, and pretty much everything else has been rising in price considerably higher than that and as a result we're losing our real purchasing power (if my dollar buys 5% less and I only earned 2% on the money, that means I essentially lost a full 3% of my wealth and hence the saying "cash is trash"). Therefore, these high yielding stocks are worth a look.

Now, of course, one must always dig deeper since there has to be a reason that people have been dumping a stock as you have to assume they would like a nice yield as well (While the market at times is definitely inefficient and where the true investors look to make buys, the majority of the time it is efficient and so it's best for us to wait for the fat pitch right down the middle of the plate and swing at those). For example, the top dividend payer here, ALSK, looks real enticing with an ~12% yield, however, their Free Cash Flow payout ratio (dividend/FCF) is at a rather high ~85%, when I like to invest in companies at no more than 80% to further ensure future payouts. Moreover, upon further examination, we see they had a sizeable one-time $29.9 million income tax benefit this prior year, which we should take out since they won't have that benefit again, raises that FCF payout ratio to over 300%. That turns me off to them for the time being as I don't see them being able to pay that great yield for the foreseeable future.

CTL on the other hand looks much more secure as we see their FCF payout ratio at ~60%. Moreover, it trades just below book value and still has a very healthy 8.5% yield. I like the stock at 2x price/sales giving it an entry point for me at $32/share.

Also, FTR looks very interesting as they have a geographically diverse stream of revenues all over America post the big acquisition of Verizon (NYSE:VZ) assets in July 2010 of approximately 4 million access lines among others aspects. It's been just over a year now and the acquisition is going much better than expected with FTR expecting a full $100 million more in synergies than initially expected. So, while the FCF payout ratio is rather high at ~80%, I'm pretty confident here as I see expected cost savings which will help bring down that down and possibly even raise dividends in the near future if management keeps up the great work. I still see FTR riskier than CTL as expected cost savings are just that, expected, and so I like it at 1.2x price/sales giving me an entry point at $6.50/share

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CTL, FTR, T over the next 72 hours.