Tuesday, July 29, 2008

Rural Telecoms Pay Big Dividends

Rural Telecoms Pay Big Dividends

If the market been a little too exciting for you lately, it may be time to consider something really boring, say, rural telephone companies.

These phone companies provide old-fashioned local and long distance voice landline services to rural areas with low population densities. Most also offer dial-up and broadband Internet services and some also offer TV and wireless phone services.

What takes rural phone companies out of the boring category, at least for me, is that they pay big dividends. Dividend yields (expected annual dividend divided by the recent share price) range between five and eight percent, and sometimes higher.

The major phone companies view the traditional landline business with disdain because it’s not growing. In fact, if you count the number of lines in use, it’s shrinking. Some users are abandoning land lines altogether, relying solely on their cell phones. Others find that they can make do with one less line when they switch from a dial-up Internet connection to DSL.

Consequently, many of the big carriers have sold off their landline businesses to smaller operators or to investment groups who later took them public. As it turns out, things are not as bleak as first thought for the rural carriers. Despite the shrinking need for landlines, most have figured out how to replace the lost business with revenues from new services such as DSL Internet connections, web hosting, digital TV and corporate communications.

Surplus Cash
Now, these rural phone companies find themselves in an unusual situation. Their landline operations are generating large and relatively stable cash flows. But, since, they’re not spending much money on developing new products or expansion, they don’t need all of that cash. So, many of them have decided to pay out their excess cash to shareholders as dividends.

Here's How to Find Them
You can use Yahoo’s user friendly Basic Screener to create a list of high dividend paying telephone companies.

Find Yahoo’s Basic Screener from its Finance homepage (finance.yahoo.com) by selecting Screener in the Stock Research section and then clicking on Launch HTML Screener.

Once there, select “Telecom Services – Domestic” from the Industry menu and specify a minimum acceptable dividend yield. Figuring that you can buy CDs in the mid-four percent range from many banks, I specified 6% for minimum dividend yield. Try reducing that requirement if you want to see more stocks.

High Dividend Telecom Domestic

Symbol Company Div/Yld More Info
CZNCITIZEN COMM CO8.40%Quote, Chart, News, Profile, Reports, Research, Msgs, Insider, Financials, Analyst Ratings
CNSLCONSOLIDATED COMMUNI11.00%Quote, Profile, Reports, Research, Msgs, Insider, Financials, Analyst Ratings
FRPFAIRPOINT COMM INC14.40%Quote, Profile, Reports, Research, Msgs, Insider, Financials, Analyst Ratings
IWAIOWA TELECOM SVCS8.50%Quote, Profile, Reports, Research, Msgs, Insider, Financials, Analyst Ratings
QQWEST COMM INTL INC9.00%Quote, Chart, Profile, Reports, Research, SEC, Msgs, Insider, Financials, Analyst Ratings
WINWINDSTREAM CORP8.40%Quote, News, Profile, Reports, Research, SEC, Msgs, Insider, Financials, Analyst Ratings

Finally, select “All Available” from the Display Information menu and click on “Find Stocks.”

Yahoo listed six stocks with dividend yields ranging from 6.7% to 8.2% when I ran the screen. They were: Citizen Communications Company, Consolidated Communications Holdings, FairPoint Communications, Hickory Tech, Iowa Telecommunications Services, and Windstream.

For each company, Yahoo lists the recent price, dividend yield, average analyst recommendations, a variety of valuation ratios, and other information.

Ignore Earnings
Analyzing rural telephone companies requires a different approach than what you’d use for growth stocks.

Most important, these telecoms are not necessarily profitable, at least in terms of reported net income. They all have huge investments in equipment, phone lines, and other infrastructure items that, according to the rules, must be depreciated. The depreciation charges deduct from reported earnings, but are non-cash accounting entries. No cash changes hands as a result of depreciation charges. So, instead of focusing on net income, pay attention to “operating cash flow,” which is the actual cash that flowed into, or out of, a firm’s bank accounts as a result of its normal operations. It’s the operating cash flow that fuels dividends.

Count Cash
You can see how a company is doing in that respect by getting a price quote and selecting “Cash Flow” in the Financials section. About half way down the report, Yahoo lists “Total Cash Flow From Operating Activities” and then further down lists “Dividends Paid.” Since the dividends are paid from cash flow, you want to verify that the operating cash flow significantly exceeds the dividends paid for each reporting period.

Check Dividend History
A firm’s dividend history is also critically important when you’re analyzing dividend stocks. You can see that on Yahoo by selecting Historical Prices (after getting a price quote) and then selecting “Dividends Only.” Yahoo displays a firm’s dividend history going back 30 years or so, if it has been paying dividends that long.

Your best dividend candidates pay dividends either quarterly or monthly, and show a record of steady, and hopefully, rising dividends. Avoid stocks showing an erratic dividend payment history. Many foreign stocks pay dividends only once or twice a year. I avoid those stocks. It would be disheartening to wait a year and then learn that the company decided to skip its next dividend.

Since there are only a handful of high dividend rural telecom candidates, spend some time to learn about each one. Yahoo’s Profile report gives you a good overview of a firm’s operations. For more details, read Reuters’ Full Description report (www.investor.reuters.com). Also, read the recent news reports and press releases that you can find for each company on Yahoo (Headlines report).

The more you know about your stocks, the better you’re results.
published 3/4/07

No comments: