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Here are two high-yield stock ideas for 2012. The first pays a yearly dividend of $0.44. The company, Telular (NASDAQ:WRLS), closed the year at $7.50, yielding 5.9%. Telular's main business focus consists of the following segments:

Telguard: Provides primary and backup alarm communication solutions for residential, VoIP, small business, financial, commercial and fire system markets. These products transmit full data from virtually all security and fire systems to central stations using the cellular network.

TankLink: Tank monitoring products offer solutions for M2M communications. Tank monitoring and automatic replenishment solutions help address the inventory management needs in the petroleum logistics, bulk chemicals and bio fuels industries.

SkyBitz, recently acquired and expected to close this quarter, will make up the third segment. Based outside of Washington, D.C., SkyBitz provides real-time information on the location and status of assets. More than 700 enterprises rely on SkyBitz technology.

Management announced cash guidance for fiscal year 2012 (net income before non-cash items) of $11-$12 million. The midpoint is an increase of approximately 20% over FY2011. This guidance was before the SkyBitz acquisition, which will be accretive so we expect this range to increase to $12-$13 million for 2012.

The company changed its strategy around 2007, when management and some board members were replaced. New management, Joseph Beatty hired in 2007 (now CEO), and Jonathan Charak, (NASDAQ:CFO) hired in 2008, changed the strategic direction of the company. The original investment thesis was people would cut the cord and buy a FWT (Fixed wireless terminal) to replace their landlines. Turns out the masses pretty much ignored FWTs, sending the stock nowhere. But, there was an unexpected side effect: people are cutting the cord in large numbers, requiring a wireless backup for their alarm systems. Not only does this generate equipment sales, but an added benefit of recurring revenue, with margins around 60%. The new management team shifted the focus from FWT sales to the alarm and the tank monitoring recurring revenue model resulting in a steady, more predictable and growing cash flow stream. The SkyBitz acquisition will accelerate recurring revenue growth.

On November 4, 2010, Telular surprised the market by announcing a special one-time cash dividend of $1.00 per share and initiated a quarterly dividend of $0.10 per share. On November 10, 2011, Telular declared a quarterly dividend of $0.11 ($0.44 per year), an increase of 10%. Given the current growth in cash the company could easily raise the dividend on a yearly basis going forward. An increase of four cents per year would yield the following cash payout ratios:

Income from continuing operations before non-cash items

Fiscal Year

Pro-forma with

SkyBitz

Dividend payments

difference

Payout ratio

2012

$12,510

$7,200

$5,310

58%

2013

$15,841

$7,900

$7,941

50%

2014

$16,354

$8,700

$7,654

53%

2015

$18,267

$9,500

$8,767

52%

A complete set of updated detailed financial data and projections supporting the above results can be found here.

WRLS Risks

  • Reliance on significant customers such as ADT, a Tyco (TYC) International company.
  • Competition from much larger companies such as Honeywell (HON) and DSC, a Tyco International company.

The second stock idea pays a yearly dividend of $0.75. The company, Frontier Communications (NASDAQ:FTR), closed the year at $5.15 yielding 14.6%.

Frontier announced a deal with Verizon Communications in May 2009, tripling the size of the company. The transaction created the nation’s fifth largest incumbent local exchange carrier (ILEC) operating in 27 states. The dividend was cut from $1.00 to $0.75 upon closing.

Contrary to management's past comments about the dividend being safe, the market is expecting another dividend cut. We outlined some possible reasons in our last article found here.

So why does this qualify as a high-yield idea? If cut, the dividend would not be eliminated but reduced 15 to 25 cents until integration is complete, saving $150-$250m a year. Why only a 15-25 cent cut? Because this would bring the free cash flow payout ratio more in line with management’s longer-term goal of 50%. This would still represent a large yield at today’s price (9.7%-11.6%) and could act as a positive to the stock price since additional cash would be available to handle any unforeseen integration problems, fund the pension or be used to improve the leverage ratio. This assumes management is even contemplating a cut.

Regardless of what follows once integration is complete operating costs and CapEx should be substantially less, increasing free cash flow and allowing for the possibility of future dividend increases.

Free cash flow data from past FTR filings supporting payout ratios in this article, in Excel format, can be downloaded here.

FTR Risks

The communications industry is extremely competitive and competition is increasing. If free cash flow continues its downward trajectory the result could be a much larger dividend cut. Although this does not appear likely given management's comments, stating expected synergies from the integration process will exceed original expectations.

The winner is

We like both stocks at the prices quoted above but if we had to choose one over the other it would be Telular. Why? Telular’s growth potential could be substantial over time while Frontier’s is limited. Telular is both a growth and yield play while Frontier is strictly a yield story at this point.

Source: 2 High-Yield Stock Ideas For 2012