There is more to life than a big dividend.

We don't normally post on a Friday night, but one of readers who won a book asked that we run the numbers on a high yielding stock instead.  He is looking at CNSL Consolidated Communications Holdings, Inc., through its subsidiaries, provides communications services to residential and business customers in Illinois, Texas, and Pennsylvania. It offers a range of telecommunications services, including local and long distance service, custom calling features, private line services, dial-up and high-speed broadband Internet access, digital television services, carrier access services, Internet protocol digital television (IPTV), network capacity services over its regional fiber optic network, directory publishing, and competitive local exchange carriers (CLEC) calling services. The company also provides telephone directory publishing, wholesale transport services on a fiber optic network in Texas, billing and collection services, inside wiring services, and maintenance services. In addition, it operates a number of complementary businesses, including telephone services to county jails and state prisons; equipment sales; operator services; and mobile and paging services. The company's business customers include small retail, commercial, light manufacturing, and service industry accounts, as well as universities and hospitals. As of December 31, 2009, it had approximately 247,235 local access lines; 72,681 CLEC access line equivalents; 100,122 digital subscriber lines; and 23,127 IPTV subscribers. The company was founded in 1894 and is headquartered in Mattoon, Illinois.  (If there is a typo there, it ain't mine.)

At face value, the subscriber numbers are driven by households, in other words the housing market.  Enough said.  (Ok there are few salvageable communities in Texas where they are building a few homes.)  Despite a contracting dismal real estate market, lets look at the numbers.

The P/E ratio is 17 which is a little rich for the market and the sector.  (Ok this is where some in the audience will say, I don't have any idea what he just said.  Please look up P/E ratio so you know what it is.  It is one of the most important comparable metrics.  By rich we mean that the S&P 500 P/E ratio is about 14 and this sector -aka industry segment- is also 14.  So comparatively speaking CNSL is more expensive.)  The Price to Book (look it up) is 9.0 compared to a sector figure of 1.6.  That is a huge premium and much higher than well established brands like K Coke 8.6 or MCD McDonalds 6.15.  Their operating margin and net margin a little soft compared to the industry.  Now they do have a sexy dividend yielding 7.7%.  When ever we see a yield like that we like to know if it is sustainable.  In order to do that we look at the payout ratio which measure how hard the company is working to make the dividend.  We like to see a payout ration in the 30-70% range.  Over 70% we think the company might be trying to buy love (get shareholders due to a big dividend.).  If income and cash flow can't support the dividend, then you got a big overpriced dog on your hand.  For kicks we looked at the SEC filing from last quarter.  Here is what spooks us, right of their own quarterly report.  "The improvement in net income in 2011 is primarily related to lower interest expense and increased earnings from our wireless partnerships.  However, we were also able to continue our focus of reducing operating expenditures (excluding those associated with the sale of our telemarketing and operator services businesses) as a result of previous and ongoing cost reduction efforts which helped us offset revenue declines."  That does not bode well for long term income and dividend sustainability.

But to make sure we do not leave any stone unturned, we ran the mystical magical Buffet Value Cruncher spreadsheet on the stock.  When we got all done, we had a 10 year projected annual return based on historical EPS growth of 11.3% and a 10 year projected annual return based upon a sustainable growth rate of -15.7%.  In our calculations we average the two giving us a minus 2.2% annual return.  Now some would say that even no growth with a 7.7% yield is pretty special.  I would ask that those who think that go back and read the CEO's comments in their quarterly filing.

We will not be adding this to our basket of tricks.  In the same sector, there are some sounder plays like AT&T and Vodaphone with decent yields in the 5% range.  Do your homework.  (There are some very attractive Euorpean Telecoms at the moment with sweet yields if you don't mind the Eurozone pains.  Look at France Telecom and Italia Telecom.

From The Whitehouse Gallery

If you haven't heard the employment figure today was horrid.  We expected 180,000 new jobs, we got 18,000.  This does not bode wll for the kid's on Pennsylvania Ave.  Here is President Obama's reaction to the news this morning.

You Go Back And Count Them Again

Have a great weekend

Salve Lucrum