High-dividend model under the microscope

LAS VEGAS--The financial strategy of paying out significant portions of cash flow for large dividends is working for some independent telcos, but may not be the right model for everyone, according to panelists at Legg Mason’s Financial Conference, which is part of the Telecom ‘05 show this week.

The model works for some because it gives companies a place to use any significant cash on the books while not damaging future prospects, according to Michael Mahoney, CEO of Commonwealth Telephone, which paid out a special $13 per share dividend earlier this year and is paying about $2 annually.

“When we looked at the future, our thinking behind dividend was two-fold,” he said. “First, we wanted to return a substantial amount of cash to shareholders. At the same time, we wanted to maintain flexibility that we felt we would need going forward in the rural space.”

Alan Wells, president and CEO of Iowa Telecom, which also is paying a large dividend, said the model refocuses the financial community on cash flow. Prior to its IPO, the company was still paying out a lot of cash, but for debt holders instead of shareholders.

“We generate the same amount of cash going out the door but it’s going to different folks,” he said. “We just came to the conclusion that a company like ours needs to be focused more on cash flow.”

However, the model isn’t for every carrier. Brian Strom, president and CEO of SureWest, said the company hasn’t changed its dividend since 1997 in part because it has wanted to use the cash to invest in network upgrades, particularly FTTH outside of its ILEC serving territory.

“As we hit the later part of the ‘90s and started to invest in CLEC opportunities and wireless opportunities, we asked if we could continue to invest and pay out those dividends,” he said.

Mahoney and Wells, though, said because cash flows are very predictable in the rural markets, paying high dividends doesn’t necessarily limit the amount of cash available for network upgrades. Iowa Telecom, for instance, is going to spend around $30 million in capex this year, which is about even with what it spent last year after subtracting a significant DSL upgrade program that was completed.

“We don’t think our structure limits us in any way,” Wells said.