What follows is a list of telecommunication companies with elevated multiples. Telecom typically carries a heavy amount of debt and, sometimes, the net debt even exceeds market capitalization. On the other hand, these companies pay earnings out through dividend yields due to the limited growth opportunities. With sector-wide consolidation, the upside from investing in a takeover target is both substantial and, in most cases, realistic. I would recommend investments in both Windstream and CenturyLink to capitalize off of the cloud era. The combined long position in these two companies should be double that of Frontier to fully exploit spreads between past and forward multiples.
Windstream (WIN) trades at a respective 34.1x and 17.9x past and forward earnings, with a dividend yield of 8.9%. Consensus estimates for Windstream's EPS forecast that it will decline by 23.7% to $0.58 in 2012, and then grow by 10.3% and 1.6% in the following two years. Assuming a multiple of 18x and a conservative 2013 EPS of $0.62, the stock would hit $11.16. It is thus more or less fairly valued.
Management has adopted an M&A strategy to extend opportunities within the sector. By purchasing rural communication assets and investing in VOIP services, data centers, and the cloud, the company has well positioned itself horizontally. Short-term debt obligations, however, are concerning, so it will be a tug-of-war between whether this or market share gains wins control over of the fundamentals.
CenturyLink (CTL) trades at a respective 31.6x and 16.2x past and forward earnings, with a dividend yield of 7.5%. Consensus estimates for CenturyLink's EPS forecast that it will decline by 10.9% to $2.38 in 2012, decline by 0.8% in 2013, and then grow by 10.6% in 2014. Assuming a multiple of 18x and a conservative 2013 EPS of $2.34, the stock would hit $42.12 for 9.1% upside.
The company's acquisition in cloud computing already appears to be paying dividends. Savvis, which is owned by CenturyLink, recently won rights to providing cloud solutions to Cognizant's clients. Cognizant is a leader in IT consulting and thus will provide a sustainable stream of free cash flow. I expect that the company will raise its dividend yield if earnings beat expectations this quarter.
Frontier (FTR) trades at a respective 27.1x and 15.6x past and forward earnings, with a dividend yield of 9.9%. Consensus estimates for Frontier's EPS forecast that it will grow by 4.3% to $0.24 in 2012, and then by 4.2% and 24% in the following two years. Assuming a multiple of 18x and a conservative 2013 EPS of $0.23, the stock would hit $4.14. This means that it is just about fairly valued.
Crunching Numbers recently asserted that shareholders should fire the board. However, as I have shown time and time again, high compensation has virtually no explicit impact on shareholder value. On the other hand, Crunching Numbers is right that the 47% dividend cut is concerning and doesn't quite resonate the message of "pay-for-performance". No matter, Frontier has the highest dividend yield of the companies highlighted in this article at 9.9% and is still 30% less volatile than the broader market.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.