To answer this question we need to determine if the dividend is safe in the long run. Telular's (WRLS) yield (at the time of this writing) is running close to 5%. The yield is attractive for those interested in generating income. We'll look at a few metrics and trends that relate to the safety of the dividend such as revenue and free cash flow followed by risks and our conclusion. First a quick summary of the business segments Telular competes in.
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: (acquired 2008) Tank monitoring products offers 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 (acquired 12/5/11) 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. SkyBitz delivers its solution via a secure web-based application that is fully customizable and requires no software downloads.
So why look at Telular now? After all, the company has been publicly traded since 1994 and their track record was not very enticing until new management, hired in 2007, changed the strategic direction of the company. The original investment thesis was people would cut the cord and buy a FCT (Fixed cellular terminal) to replace their landlines. Turns out the masses pretty much ignored FCTs, sending the stock nowhere. But, there was an unexpected side effect: they 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 service revenue, with gross margins exceeding 70%.
Telular has deemphasized its FCT business over the past several years since it is a one-time product sale and generates no recurring revenue. The FCT business has undergone significant competition from non-U.S. companies and is subject to substitution by smartphones eliminating the need for a separate FCT device.
Growing Service Revenues Impact Cash Flow
Management expanded the recurring service revenue model through acquisitions adding both the TankLink and SkyBitz businesses described above. SkyBitz is a major transaction for Telular, increasing the size of the company approximately 70%. The deal closed on February 1, 2012. The past and projected service revenue growth per diluted share is:
The spike in service revenue is due to the SkyBitz acquisition.
FCF (free cash flow) turned positive in 2008 and has accelerated in the following years due to increases in the high gross margin recurring revenues shown above. This lead to the announcement of a special one-time cash dividend of $1.00 per share and initiated a quarterly dividend of $0.10 per share during FY2011. The quarterly dividend was increased 10% to $0.11 in FY 2012.
The above chart compares the annual dividend, started in 2011, with FCF along with the FCF payout ratio (defined as the dividend divided by FCF). The dividend is comfortably below the FCF trend indicating the dividend is safe. More important the FCF trend is impressive. A more detailed discussion on dividend safety can be found here.
Actual financial results and longer term projections based on their past financial track record, short term guidance and the recent acquisition are shown below:
A drop in FCF is expected in 2012 due to a $30 million loan needed in the SkyBitz transaction. The positive trend is expected to resume in the following years allowing management the ability to increase the dividend going forward. Longer term the dividend is safe based on the trends shown above.
A complete set of updated detailed past financial data, assumptions and projections reflected in this article can be downloaded here.
- Reliance on significant customers such as ADT, a Tyco (TYC) International company in the Telguard segment although this risk has been reduced with the acquisition of SkyBitz.
- Competition from much larger companies such as Honeywell (HON) and Qualcomm (QCOM) whose financial resources are substantially greater than Telular.
- The ability to successfully integrate SkyBitz into the Telular culture. Earnings will include the first full quarter of SkyBitz results when Telular reports around the end of July. (Last quarter only included 2 months due to the timing of the deal)
- Prolonged economic uncertainty.
- Micro Cap stock with low trading volume.
So is Telular a worthy candidate for dividend income investors? The current FCF trend would indicate yes. Much of this would depend on how well the SkyBitz integration proceeds. Telular will release earnings on August 2 which will include the first full quarter of SkyBitz results. Conservative investors may want to wait until then to insure there are no surprises regarding FCF that could impact the dividend.
Disclosure: I am long WRLS.