It is common knowledge that old school telecommunications carriers are stable, income paying stocks. In the last few years that knowledge has come under pressure as the landline business, in general, has declined in the wake of cell phone competitors and internet options such as Skype and Vonage Holdings (NYSE:VG) proliferate. But there are still a few independent landline providers out there, and that is what I will focus on today.
Windstream (NASDAQ:WIN) is among the largest independent landline-based phone systems, serving about 3 million primarily rural customers across 29 states. The company's 2011 was dominated by Windstream's fourth quarter, $2.3 billion purchase of PAETEC, which was a service provider with over 35,000 miles of fiber cable, along with seven data centers. The purchase was paid for with an issuance of stock and the assumption of over a $1 billion in debt, further leveraging Windstream's already precarious balance sheet. As of year-end 2011, long term debt was 88% of capitalization, and earnings scarcely covered by two times the interest on that debt. It is a good bet there will be no further substantial acquisitions in 2012.
The PAETEC deal was far from the only acquisition that Windstream has made. The company has made a bet that broadband and business service abilities would be easier to buy than to build. In 2010 it acquired Hosted Solutions, and in 2009 acquired Nuvox. These acquisitions, and others, have veered Windstream into far more than a simple home land line company. In the first quarter of 2012, on a pro forma basis, business revenues increased by 3% from the year ago quarter, versus small declines in the consumer end of the portfolio. All told, business revenue supplied just over 60% of all service revenue for the quarter
In the first quarter of 2012 Windstream reported revenue up about 50% from the year-earlier quarter due to the merger. On a pro forma basis, though, revenue fell about 1%, to $1.545 billion. Net income more than doubled, to $64.6 million, or 11 cents per share.
The reason why many investors buy stocks like Windstream is for its dividend. For the last five years, Windstream has paid shareholders $0.25 quarterly, for a current yield of 10.1%. The problem is, the last time Windstream posted earnings of $0.25 in a quarter, and it was 2008. Quoting from the 2012 First-Quarter report, Windstream stated among its goals is to "Easily maintain the dividend" out of cash flows, which in 2011 came to $2.06 per share. I expect the earnings picture to improve also as the capital expenditure budget comes back under control by 2013.
I do not look for meaningful capital growth from Windstream. As I mentioned, its balance sheet is overly leveraged. But I really do believe that its double digit yield is about as safe as any other ultra high yield, and for income investors, there are few better choices.
Like many other industries, the Canadian version of telecom looks very appealing to me. BCE serves some 70% of the Canadian citizens, primarily in Ontario and Quebec. It owns a myriad of operating companies and assets, the best known being landline carrier Bell Canada, wireless carrier Bell Mobility, and the Montreal Canadians Hockey team.
In the first quarter of 2012, BCE posted actual earnings of $574 million, and adjusted earnings of $580 million. In the same quarter of 2011, earnings were $503 million, and adjusted earnings were $543 million. Adjusted earnings per share came to $0.75 per share, a 4% advance from the adjusted $0.72 of the year earlier.
Not unlike its American peers Verizon (NYSE:VZ) and AT&T (NYSE:T), BCE is using its other units to offset the inexorable decline in the landline telephone unit. In 2011, the company formed Bell Media. Growth in that unit and the wireless unit led to an overall revenue report in the first quarter of 2012 up 11.6% from the year earlier. Even the landline unit managed to be roughly stagnant on a year over year basis.
BCE is ever enlarging its grasp. It has entered an agreement with Rogers Communications (NYSE:RCI) to jointly take a controlling stake in Maple Leaf Sports, the owner of the Toronto Maple Leafs. At the same time, the core business needs plenty of cash, as Bell Mobility is working to establish a national 4G LTE network. Fortunately, BCE has some financial flexibility, as its debt comprises just 46% of capital.
BCE raised its dividend in the first quarter to an annual rate of $2.17 per share, for a yield of 5.3%. I see BCE as a premier holding for conservative, growth and income investors.
TW Telecom (NASDAQ:TWTC) was spun off from Time Warner (TWC) in 1999, and is now a midsized landline and internet provider. The company has been on a roll in recent months, as its stock has shot up by over 40% since October, 2011. In the first quarter of 2012 TW reported $359 million in revenue. This was an 8% increase from the first quarter of 2011, but more significantly, was the 30th consecutive quarter, on a sequential basis, of increased revenue. Net income came to $19.3 million, or $0.13 per share, a 53% improvement from the year earlier quarter, and two cents per share above analysts' expectations.
TW does not pay a dividend, but does return money to shareholders. It completed a $50 million share repurchase in 2012, and launched a new $300 million plan. So, what is not to like? How about a price-to-earnings ratio of 52! Clearly, TW price has gotten ahead of itself, so even considering analysts' expected 21% profit growth, I would look for some price pullback, say to below $20 per share, before committing to this equity.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.