Dilok Klaisataporn
Let’s start with an honest quiz. Think of five names that come to your mind when speaking of Dividend Kings. That is, companies that have raised their dividends for close to 50 years or more. I will go first.
Coca-Cola (KO)
Altria Group (MO)
Johnson & Johnson (JNJ)
3M Company (MMM)
PepsiCo, Inc. (PEP)
I’d bet that most of you had some, if not all the names I gave above, in addition to other venerable names like Target Corporation (TGT) and Walmart Inc. (WMT). All large, multi-billion, internationally acclaimed corporations whose business is almost guaranteed to survive any downturn (and they have in the past over half a century) and whose dividends appear rock solid.
Now, as someone who loves dividend growth stock, I bring you these numbers about a company/stock:
- The stock at present yields almost 7.50%. Your eyes light up.
- But the skeptic in you thinks, could this be junk yield? You may be right. It may well be junk yield as the company is projected to post an EPS loss between 15 cents and 32 cents a share in the next three Fiscal Years.
- How large is this company, you begin to wonder. Since large corporations can withstand the odd bad year or two. I say it’s current market cap is about $1 Billion, which is not much these days. Your doubts start to creep in. But you decide to ask a few more questions.
- How is the company’s financial strength, you ask? Sometimes, companies pay from its cash reserves and this is a good question. I answer $360 Million. Your eyes light up again as that represents about 30% of the company’s current market cap. An unusually high number, which most times signal that the market is not too optimistic about the company’s future prospects. But you decide, the tie-breaker is the next question since things seem to be balanced so far with some good and some, not-so-good numbers.
- Your last question is about the company’s debt. I say $3.75 Billion. You shudder and say I should be crazy to even consider this stock.
And then I say, welcome to the quandary that is Telephone and Data Systems, Inc. (NYSE:TDS), a company that has increased dividends for 49 consecutive years and is merely a year away from joining the venerable Dividend Kings list and take its rightful place next to the likes of Coca-Cola and Altria Group.
I wouldn’t blame you if you’ve never heard of this company at all. After all, the market is dominated by the likes of AT&T (T), Verizon Communications, Inc. (VZ) and T-Mobile US, Inc. (TMUS). Let’s call these the “Big Three”. If you are not familiar with the history of TDS and the Carlson family, check this out in detail. But for the purpose of this article, I am listing out the basics below:
- TDS was founded in 1969. LeRoy T. Carlson, the founder, died at the age of 100 in 2016 while holding the Chairman title Emeritus. His son, LeRoy T. Carlson, Jr. has been the CEO of the company since 1986.
- If you guessed this is a closely-held, family influenced business, you are right. Even now, at least four members of the Carlson family are currently listed in the Board of Directors. The
- Publicly listed United States Cellular Corporation (USM) is a subsidiary of TDS, along with TDS Telecom.
Now with the basics out of the way, how does TDS make money? Quite simply by dominating the telecommunication market in rural communities. In other words, in a niche market that may not be seen as lucrative by the “Big Three” mentioned above. In addition, if and when the “Big Three” play in the rural and suburban communities dominated by TDS, they rent TDS’s tower as it makes sense instead of building their own.
Despite the stock price going from $30 to $10 in the last five years and the company’s financial strength far from robust, the company has continued to increase dividends at 3%/yr over the same five year period. If you ask why, I’ve already alluded to the answer above. But here it is in plain words. As quoted in this article, the Carlson family controls not just the voting rights in TDS but also about 75% of the subsidiary, US Celluar. Getting increasing dividends is of paramount importance when your share price goes nowhere and you don’t want to reduce your stakes by selling your shares.
Carlson’s family has super-majority voting rights in publicly-traded Telephone & Data Systems, despite only owning about 10 percent of its shares. TDS itself owns 73 percent of US Cellular stock.”
The article quoted above is more than 5 years old but my search is more or less confirming these numbers.
TDS Stock Price (Google Finance)
As a confirmation, the chart shown below says the annual dividend has almost quadrupled between 1995 and 2022. That is not earth shattering if you look at the CAGR but to do so despite being a small player not willing (or capable of) to step out of its comfort zone shows the company values its shareholders (if you are an optimist) and/or its founding family (if you are a skeptic/pessimist). In addition, the company also has a history of buybacks with TDS purchasing $40 Million in 2022 and USM purchasing $43 Million.
TDS Dividend Growth (tdsinc.com)
Do I expect the dividend growth to continue? For the next year or two, sure. I fully expect the company to reach the 50 year mark and join the Dividend Kings list. It deserves to. But do I expect the company to make it to even 60? Extremely unlikely. A few reasons below:
- Recent Free Cash Flow (“FCF”) numbers are alarming to put it mildly. It gets even worse if you factor in the company’s dividend commitment to shareholders as the 112.46 Million shares outstanding mean that the company is committing $20.80 to dividends/quarter. The average quarterly FCF over the last five years stands at $20.15 Million.
- The current CEO, Carlson, Jr. is nearing 80 and it is already commendable that the company successfully stayed independent and fairly success across two full generations. To expect the third generation to operate in the same way might be a stretch.
- The “Big Three” may time their buyout offer with any potential news around the departure of the current CEO, fully knowing the shareholders will approve a buyout given the share price performance over the last few years. In addition, TDS’ tower revenue grew 13% in 2022 and at some point you’d think the “Big Three” may either do something on their own over the long term or leverage that to get an attractive buying price for TDS as a whole.
- Finally, there is nothing wrong in operating in a niche market. In fact, in many cases, a niche market is sought after by investors and potential buyers. But not when the niche market is bleeding as shown in the two graphs below (numbers in thousands).
Post Paid Churn (tdsinc.com) Prepaid Churn (tdsinc.com)
Conclusion
TDS may drag along for a few more years as a standalone company and is extremely likely to join the Dividend Kings club. But that maybe the final hurrah for it as a stand-alone company as it is almost impossible to see it grow beyond its current niche. With fundamental business deteriorating, massive debt, worsening FCF, it is hard to see any positives in TDS except its rich dividend history. While buyout potential exists, an offer is likely to come in at far depressed levels (in terms of share price).
I cannot recommend buying the common stock given all these concerns. If you do need a high-yield for income purposes and believe TDS’ future may have some semblance to its past when it comes to reliable dividends payments, go for the higher yield preferred shares.
