Recently we warned readers about the exorbitantly high dividend yield associated with communications REIT Uniti Group (UNIT) , which reflected the sharp drop in the share price and financial uncertainty as key customer, Windstream Holdings (WIN) , enters bankruptcy.
However, that does not mean all high dividend yield stocks should be off the table for income-seeking investors.
Sticking with the communications sector, a company worth examining is Consolidated Communications Holdings (CNSL) and its current dividend yield of 14.2%. A dividend yield such as this is eye catching, even if it appears tame compared to AT&T's (T) current 6.6%.
For more than a decade, Consolidated Communications has been paying a quarterly dividend of $0.3874 per share to CNSL holders. In that time, the company's business has grown from just over $400 million in revenue to $1.4 billion exiting 2018.
As it has expanded, through a combination of organic growth and acquisitions, CNSL's business has evolved to cover both commercial and consumer communications, broadband, data, and voice services across 23 states. With this expansion, the size of the company's commercial business has grown. It accounted for 44% of 2018 revenue, with the balance derived from its consumer facing business (39% of revenue) and other products and services.
Contrasting the commercial vs. consumer units, we prefer the commercial given that businesses are less inclined to switch providers and because of the increasing demand for bandwidth that has propelled Consolidated's commercial data business higher over the last two years. At 25% of revenue, it is the company's largest business segment. The addition of VoIP services has also helped Consolidated win telephony business from the incumbent Bell companies for its commercial business.
By comparison, Consolidated's consumer-facing business is confronting the same pressures as the video and voice businesses at Verizon (VZ) and others as consumers cut the cord. The silver lining for Consolidated is the same for Verizon and Comcast (CMCSA) : as consumers cut the cord, they tend to upsize their broadband data subscription.
The key to Consolidated's operations, and therefore its ability keep its streak of 55 consecutive quarterly dividend payments alive, is the subscription nature of its business model. Businesses need connectivity so their employees can work and transact, and consumers will need connectivity to shop, pay bills, communicate, and the like online. In a perfect world, Consolidated would have a wireless business, too.
For the next few years, at least until national 5G networks are built out, odds are Consolidated will see its consumer business leak subscribers at a modest rate for voice and video services. With EBITDA margins of 34%-38% over the last few years, the company's operating cash flow is sizable enough to fund its dividend payments and allow it to acquire other businesses to drive its revenue and profits higher.
Some may view Consolidated's business of consumer and commercial connectivity as humdrum, but customers in both areas should keep the dividend checks coming.
Chris Versace is a regular contributor to Real Money Pro specializing in dividend stocks and income investing. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen, Nick McCullum, Peter Tchir and others.)
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