A 6.9% Yield From This Telecom Could Boost Your Current Income

| About: Cincinnati Bell (CBB)


CBB has a 6.75% preferred stock that is currently yielding 6.9%.

The issue also sports preferential taxation, boosting after-tax yield over a similar debt issue.

Interest rate risk is the real threat to CBB-B as it has no stated maturity date but income investors must prepare for that with all fixed income instruments.

Cincinnati Bell (NYSE:CBB) is a full service regional provider of entertainment, data and voice communication services and equipment in the Cincinnati and Dayton areas of Ohio. The company is a small telecommunications outfit that traces its roots back to 1873. The common stock has had a hard time getting out of its own way on profitability and growth issues and also, pays no dividend for income investors. However, CBB does have a preferred stock that pays a very nice yield and could bolster your income portfolio.

That issue is the CBB-B (or CBBpB, depending on your broker), a relic of the 1999 merger with IXC that was issued to convert a similar IXC issue into a CBB issue. CBB-B is a traditional convertible preferred stock, meaning that it has no stated maturity date but it also can be converted into common stock under certain conditions. With no stated maturity date, CBB-B is subject to interest rate risk but is also available for investors to hold 'forever' if the investor chooses; this issue has no stated end date like a debt issue does.

The conversion factor isn't much of a factor at all as the preferred shares are convertible into 1.442 shares of common stock. The problem? The preferred shares were issued for $50 each (1/20th of each $1,000 share) and the common is trading for just over three bucks. Thus, the common would need to rise about 1,000% in order for the conversion to become a factor. In other words, treat CBB-B as a traditional preferred with no conversion factor because it will never get there.

Even though CBB-B has no stated maturity date it does have a call date that passed in 2000. That means that CBB-B can call this issue whenever it wants and redeem it for the full $50 issue price. If that were to happen, which seems unlikely given that the company has had 14 years and several years of rock bottom interest rates to refinance, investors would be entitled to a small capital gain on their positions.

I mentioned the preferred was issued at $50 per share but as of right now, shares are trading for a little under $49 as of this writing. That means a call would boost investors to a capital gain of about a dollar, or 2%, per share. But it also means the dividend yield is higher.

The dividend on CBB-B is paid out in quarterly installments for an annual payout of $3.375 per share. That is good for a coupon yield of 6.75% and a current yield of 6.9%. That's a terrific yield in today's environment and considering the yield is safe, with CBB having never missed a payment, it looks quite attractive.

Another attractive feature of this preferred is that dividends are cumulative. That means that if CBB were ever to miss a payment on the preferred it would be obligated to make that payment up. That is important because non-cumulative issues allow the issuer to miss payments without being obligated to do anything; CBB would have to make up all payments if one were to be missed. It provides a little bit of protection for holders.

And since CBB-B is a traditional preferred, it is also eligible for the preferential tax treatment of dividends. That means that if you're holding CBB-B in a taxable account you are entitled to lower taxation than if CBB-B were a trust preferred or some kind of debt issue, which would be taxed at ordinary income rates as interest. Depending on your tax situation, that could provide a substantial boost to the after-tax yield.

CBB-B offers investors a nice, stable yield that pays out quarterly and is eligible for preferential tax treatment. The issue will be subject to interest rate risk as it has no stated maturity date but that will be true of any income issue that isn't due in the near future, including debt. CBB's history of making payments on CBB-B and the cumulative nature of CBB-B mean the yield should be pretty safe. If you're looking for tax-advantaged, stable yield, you can do much worse than the 6.9% you can collect from CBB-B. Just make sure you understand that interest rate risk is real and can cause price fluctuations of the issue. But if you're a long term holder and just want the income, it shouldn't matter.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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