DIVIDENDS HATCHING HIGHER IPOS

The upcoming spinoff of Sprint Nextel's local exchange assets may be the sign of things to come for larger ILECs that want to sell rural assets, according to a recent Probe Financial Associates report.

Veteran analyst Victor Schnee, founder of Probe Research, has now turned his focus to financial investment research, and in his latest report, “Rural Telcos — Anachronisms or Harbingers?” he notes that, by offering more substantial dividends, rural carriers such as Consolidated Communications, Valor and Iowa Telecom, are going public at valuations of up to $4000 an access line.

By contrast, Bell company valuations — when the value of wireless assets is stripped — currently run between $500 and $1300 per access line.

“There's a disconnect here,” Schnee said. “The [independent company] stocks are not being valued on the basis of per line cost but on dividend yield. The question is how long these guys can sustain higher dividends before it affects their capex?”

Sprint Nextel has set dividends at $300 million but could go higher because that is “a very low percentage of their revenue,” he said.

A higher Sprint Nextel price could encourage companies such as Verizon, which halted its upstate New York asset sale because of low offers, to peel off additional access lines. If the price doesn't approach what the independents have been getting, however, that could prove they also are being rewarded for greater efficiency and higher operating margins than their larger counterparts.

“[Sprint] is the largest of the independent spinoffs — some eight million lines,” Schnee said. “It's going to be very interesting to see what happens on this one.”

FOLLOW UP

In the very first issue of The Independent, we explored two new financial models for rural telcos — Income Deposit Shares and high-dividend refinancing. In both instances, investors are lured by dividend yields that are often well into double digits, a huge appeal in the current interest rate environment. However, critics — mostly chief financial officers of other publicly traded carriers that don't offer big dividends — claimed that paying huge percentages of cash flow to dividend will end up starving capital expense budgets at a time when large investments might be needed to fend off competition. Defenders of the models said there's enough predictable cash flow for large dividends and capital investment. The results? Judge for yourself.