Source of Income: Where Your Company's Money Comes From

In a previous post, I mentioned how CenturyTel (CTL) has kept dividends too low for too long.

Now, I want to dig deeper into CTL's finances, since it does sport a nice 9% dividend and what looks at first to be a sustainable 6% EPS growth -- which could in theory support a similarly growing divided.


About 12% of CTL's revenues come from government subsidies. The majority comes from a program called USF -- Universal Service support Funds. These programs are intended to subsidize pricing of telecommunication services (phone, cable, internet) on rural areas, to make rates charged rural customers more comparable to those charged in urban areas. The program is funded by taxes imposed on urban carriers and given to rural carriers such as CenturyTel.

If this were a political or economics blog, I'd point out the absurdity that subsidies typically are, this one included. I'd even point out that this Robin Hood program is nothing more than yet another tax -- a tax on urban users of phone, internet and cable.

However, this is an investing blog, and as such, I should only point out that while 12% of revenues is not "a large fraction" it is not an insignificant fraction either. If this subsidy were to be cut, the effect on the bottom line could be a reduction in EPS of about 57% due to their leverage! That's not peanuts.

In the annual report, management discusses in great details the risks of losing this subsidy:
These governmental programs are reviewed and amended from time to time, and we cannot assure you that they will not be changed or impacted in a manner adverse to us.
To add insult to injury, CTL has about 1/3 of its debt commitments -- about a billion dollars -- coming due in 2010 and 2011. If the subsidy is cut or reduced, they could have trouble paying this debt and would need to raise money. With the credit markets the way they are, there's no saying how that would turn out.

Also from the annual report is their policy on dividends:
[W]e plan to continue our current dividend practices. (...) Our board is free to change or suspend our dividend practices at any time. Our common shareholders should be aware that they have no contractual or other legal right to dividends.
I admire them for explaining the obvious -- that the board has the right to cancel dividends at any time. And I think that they just might have to use this very right in the near future.

For now, I'm staying away from this high dividend payer.

Disclosure: no shares held at the time of writing.

1 comment:

  1. I just found this blog as part of the Dividend and value network. I really like it.

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    John Prendergast
    CEO & Founder
    Value Media, Inc.