Dear Mr. Berko: My broker has recommended 1,500 shares of Consolidated Communications for growth and income. As you know, it yields 7.6 percent and is in the telephone/communications industry, which is growing faster than the general economy. Also, what do you think about the Vanguard REIT fund for income and as an inflation hedge? My broker recommends I buy 500 shares.
— BW, Wilmington, N.C.
Dear BW: This year, Consolidated Communications (CNSL-$20.75) expects to sell $615 million worth of communications services — including long-distance and local phone service, digital TV, high-speed Internet, and network capacity services over its fiber-optic network. CNSL’s business and residential customers live and communicate from their homes and businesses in Pennsylvania, Kansas, Texas, Missouri, Illinois and California. And CNSL’s $1.55 annual dividend, yielding 7.6 percent, has been unchanged since Citigroup and Credit Suisse First Boston took it public at $13 in 2005. While revenue growth has been consistent and nearly doubled in that time frame, earnings have creaked up and down like a broken elevator. And I can’t figure why a company that has never earned more than 94 cents a share insists on paying a $1.55 dividend; while doing so, it has created a working capital deficit exceeding $35 million.
Except for CNSL’s high dividend payments — a large portion of which comes from cash flow — I can’t figure out why Reuters, S&P, Value Line, “Jaymond Rames,” Jefferies, Wells Fargo and Davidson rank CNSL as a “buy.” Their recommendations further confound me because CNSL’s 5.5 percent net profit margins are half of those of others in the telecommunications industry.
I spoke with two analysts about why these big brokerages like this stock, and the best they would give me is: “Management is getting its financial house in order,” and “consumer and business demand is growing,” and “dividend coverage will improve due to better product and service offering.”