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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.
Unloved
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.
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 |
