Consolidated Communications Holdings Inc: This 12.6% Yield is No Joke
This High-Yield Stock Deserves Investors’ Attention
In a volatile market, dividends can provide a peace of mind.
It doesn’t matter what the stock prices are doing, shareholders of solid dividend-paying companies can always expect their dividend checks to arrive in the mail. In a market downturn where every stock seems to be dropping to the floor, what more could you want?
That’s why in this article, the spotlight is on Consolidated Communications Holdings Inc (NASDAQ:CNSL).
Compared to popular dividend stocks like The Coca-Cola Co (NYSE:KO) and Johnson & Johnson (NYSE:JNJ), Consolidated Communications has a much smaller following in the investment community. However, investors who purchase CNSL stock today would be collecting a cash yield much higher than what’s offered at those well-known dividend giants.
Let me explain. . .
Consolidated Communications Holdings Inc
Headquartered in Mattoon, Illinois, Consolidated Communications is a provider broadband and business communications services. The company operates in 23 states and has a diverse customer base that includes businesses, and consumers, wireless carriers.
Consolidated Communications is one of the top 10 fiber providers in the US., with an advanced fiber optic network spanning more than 36,000 fiber route miles. It also has 9,600 on net buildings, 3,300 fiber connections for wireless providers, and 785,000 data and Internet connections. (Source: “Consolidated Communications Investor Presentation,” Consolidated Communications Holdings Inc, last accessed October 29, 2018.)
Through its expansive fiber optic network, the company provides a wide range of communications solutions, including video, data, voice, cloud computing, managed services, and wireless backhaul.
If you’ve been following this column, you’d know that I’m a big fan of the telecommunications industry. Due to the high barriers to entry of the business, competition is limited among communications service providers. As a result, existing companies can reap higher profits than under a perfectly competitive environment.
CNSL Stock: Providing a Generous Income Stream
Of course, Consolidate Communications is not the biggest telecom player. However, it offers an income stream so generous that even the biggest telecoms could not match.
Right now, CNSL stock has a quarterly dividend rate of $0.38738 per share, translating to an annual yield of 12.6%.
And if you are concerned about the safety of this ultra-high yielder’s dividends, don’t be: despite offering a dividend policy more generous than 99% of stocks in today’s market, Consolidated Communications has no problem covering its payout.
You see, the company reports something called “cash available” to pay dividends. It is calculated by taking adjusted earnings before interest, tax, depreciation and amortization, adding back cash interest income, and then subtracting cash interest expense, capital expenditures, and cash income taxes. By comparing this figure to the company’s actual dividends, investors can see whether it earned enough cash to cover the payout.
In the second quarter of 2018, Consolidated Communications generated cash available to pay dividends of $39.3 million while paying total dividends of $27.6 million. That translated to a payout ratio of 70.2%, leaving a margin of safety. Moreover, the payout ratio represented a solid improvement from the year-ago period, in which CNSL stock paid out 78% of its cash available to pay dividends. (Source: “Consolidated Communications Reports Second Quarter 2018 Results,” Consolidated Communications Holdings Inc, August 2, 2018.)
In the first half of this year, Consolidated Communications generated $83.6 million in cash available to pay dividends. Its actual distributions, on the other hand, totaled $55.0 million. That came out to a payout ratio of 65.8%.
During the latest earnings conference call, management said that they expect the company’s dividend payout ratio “to be in the mid 60s for the full year.” (Source: “Consolidated Communications’ (CNSL) CEO Bob Udell on Q2 2018 Results – Earnings Call Transcript,” Seeking Alpha, August 4, 2018.)
A Safe Income Play for Yield-Seeking Investors
At the end of the day, keep in mind that despite not being a well-known dividend stock, Consolidated Communications has a pretty solid dividend-paying history. Since the company went public in 2005, it had declared 53 consecutive quarterly dividends and has never cut back its payout. (Source: “Dividend History,” Consolidated Communications Holdings Inc, last accessed October 29, 2018.)
Going forward, Consolidated Communications stands to benefit from the synergies on its latest acquisition, FairPoint Communications Inc. Last year, the company acquired FairPoint for $1.3 billion, adding 22,00 fiber route miles to its fiber network, without any overlapping markets. At the latest earnings conference call, management said that Consolidated Communications has already recognized over $42.0 million in cumulative run rate synergies on this deal, and the company is on track to achieve its synergy target of $55.0 million within two years of closing. (Source: Seeking Alpha, Seeking Alpha, August 4, 2018, op cit.)
Consolidated Communications Holdings Inc has an established position in an industry with high barriers to entry. It pays generous dividends and earns more than enough cash to cover the payout. With a safe yield of 12.6%, CNSL stock could be an income opportunity in today’s volatile market.