Consolidated Communications Holdings Inc: A 13.4% Yield That Remains Safe
February 15, 2018
This 13.4% Yield Looks Interesting
Generally, big-yield names come with big risk. Double-digit payouts run on borrowed time. And any time you see an tall yield, the name comes with higher risk.
Not so with Consolidated Communications Holdings Inc (NASDAQ:CNSL). The stock sports a 13.4% payout, which means the business sits at the upper end of the risk spectrum. But for such a high-yielding name, the dividend looks remarkably solid.
The telecom company provides phone, Internet, and television to 1.5 million customers across the country. This tends to resemble a slow, reliable business. Even during a recession, consumers never abandon their Internet or mobile phone subscriptions.
This has created a reliable income stream for owners. Consolidated Communications has paid a dividend to shareholders since 2006, even through the financial crisis. And last quarter, management declared their 50th consecutive quarterly dividend. (Source: “Consolidated Communications Reports Third Quarter 2017 Results,” Consolidated Communications Holdings Inc, November 2, 2017.)
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That payout looks secure for now. Through the first nine months of 2017, this business generated $97.2 million in cash available to pay dividends. Over the same period, management paid out about $66.7 million in dividends. This comes out to a payout ratio of 68%. This figure sits well within my comfort zone, as it leaves the company with a big buffer if income drops. Even if cash flow fell by a third, it could still be able to cover the dividend.
That said, the Consolidated story comes with some blemishes. Last year, executives completed a $1.3 billion acquisition of FairPoint Communications Inc. The deal will pad cash flow, add more than 36,000 route miles of fiber network, and achieve $55.0 million in annual coat savings. (Source: “Consolidated Communications closes on $1.3B FairPoint buyout,” Seeking Alpha, July 3, 2017.)
Management funded most of this deal, however, with debt. Any time you saddle your balance sheet with too many liabilities, things can go wrong fast. Debt cuts into your wiggle room and gives the business less ability to maneuver.
In the case of Consolidated Communications Holdings Inc, it’s not tough to imagine what could go wrong here. A small bump in interest rates could eat into the business’s profits. If revenues disappoint (cord cutting, anyone?) or management can’t achieve the promised cash savings, this debt load could put the dividend at risk.
Shareholders will need to watch the financial results quarter to quarter. And of course, nobody will call Communications Holdings Inc’s distribution a sure thing. But with a yield approaching 13.4%, investors are being well compensated for the risk they’re taking.
