Plenty of Free Cash Notwithstanding, Here's Why Not to Hold These Two Widely-Held Stocks

Includes: BMY, S
by: Larry Meyers

Sprint Nextel (NYSE:S) is not the kind of business you want to be invested in these days. It is a commodity. Wireless or wired phone companies all sell the same darn thing, and none of them are really any different from the other. That means they’ll constantly be spending a ton of money trying to lure new subscribers (never mind the expense just to keep them), constantly have to manage pricing points in the face of stiff competition, and somehow convince people that they are, well, just better. The company’s latest earnings report says it all.

Sprint lost over $800 million this quarter. They have literally lost almost $10 billion over the past three and a half years. If it weren’t for the fact that they manage a couple of billion in free cash flow each year, they’d never be able to support the $18.5 billion in debt they carry or the $1.4 billion in interest they have to pay each year. There are virtually no more insiders (0.14% insider holdings), so management’s interests are not that aligned with shareholders.

And while some readers took me to task for trashing AT&T (NYSE:T) because it offers little in the way of capital gains but a dividend of 5.7%, they can’t scream at me with Sprint. It has no dividend. At least fellow telecom giant Verizon (NYSE:VZ) pays a 5.2% dividend. As with AT&T, both also make billions in free cash flow each year, and Verizon has a 5-year expected annualized growth rate of 8.9%.

Tell me again why Sprint is widely held?

I feel the same way about Bristol-Meyers (NYSE:BMY), but for slightly different reasons. On the positive side, the company is solidly profitable, churns out tons of free cash flow, has $3 billion in net cash, and plenty of pharmaceutical products that treat serious diseases. So what’s not to like? The same thing that I don’t like about AT&T – there’s no growth. Analysts see no annualized growth over the next five years. Insider holdings are virtually non-existent. Now I know you retirement investors are going to scream that the company pays a 4.5% yield. Not so bad. But if you want a pharmaceutical company in your retirement portfolio, why not go with AstraZeneca PLC (NYSE:AZN)? Like Bristol Meyers, the stock has gone nowhere in the past ten years, but it pays a 7.2% dividend, and is a solid company. I say dump Bristol Meyers in favor of AstraZeneca.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.