CSAL, WIN and Telecoms

Dear Mr. Berko: My stockbroker recommended buying 1,000 shares of Communications Sales & Leasing at $30. We held off, and it’s now $25. It pays an 8 percent dividend. We believe that the telecommunications industry is a no-brainer. People have to use their phones, computers and TVs, so it seems there is little chance of a recession in this business. My wife and I own Frontier Communications, which yields 10 percent, CenturyLink, which yields me 8 percent, Consolidated Communications, yielding 6.5 percent, and Telefonica SA, paying 9.12 percent. But their share prices aren’t doing well, which concerns me. What is your opinion? This is slow, slow torture. — PD, Buffalo, N.Y.

Dear PD: It sounds more like hemorrhoidal agony!

In late April and early May of 2015, Bank of America Merrill Lynch and Citigroup issued an “overweight” opinion on Communications Sales & Leasing (CSAL-$25). CS&L, a communications real estate investment trust, was trading at $30, and the $2.40 dividend was yielding a sweet 8 percent. And early last October, Morgan Stanley also decided to issue an “overweight” recommendation on CSAL. At that time, it was trading 3 points lower, at $27, and the $2.40 dividend was yielding 8.8 percent. Though the yield was attractive and CS&L’s business model looked impressive, be thankful you didn’t pull the trigger. Your hesitancy saved you a bundle of bucks, even though J.P. Morgan, D.A. Davidson and UBS have “overweight” and “buy” recommendations on the stock. Oh well! It was certainly easier making investment decisions when Treasury bonds paid 5 percent, the world was flat and Alan “Mumbles” Greenspan was head of the Federal Reserve.

CSAL, incorporated in 2014 and based in Little Rock, Arkansas, was a spinoff from Windstream Holdings in April 2015. CSAL owns, builds and invests in mission-critical communications infrastructure. It does this by acquiring telecom assets such as fiber optics, wireless communications towers, ground leases, data centers and copper and coaxial consumer broadband networks. CSAL also provides wireless infrastructure solutions for the communications industry. That’s a mouthful! CSAL currently leases 4.2 million fiber strand miles and 86 wireless towers to Windstream Holdings (WIN-$7.70).

WIN, with $5.3 billion in revenues, is one of the largest wireline telecoms in the U.S. and a provider of advanced network communications plus cloud computing. Also based in Little Rock, it has been losing revenues steadily since 2013 and recording substantial cumulative losses. WIN expects to lose $3.15 a share this year and at least $2 a share in 2017, and its 60-cent dividend — which derives from cash flow, not earnings — yields 8 percent. Raymond James, Deutsche Bank, UBS, Ned Davis Research and Thomson Reuters each have a “sell” recommendation on WIN, and Value Line wouldn’t touch it with a swagger stick or quarterstaff. CSAL’s dependency on WIN’s ability to continue its lease payments concerns me, and WIN’s dependency on its current management to guide this company to profitability also concerns me.

I agree with you about the future of the telecommunications industry, but only if you select the right stocks, and CSAL ain’t one of them. In the past few months, enthusiasm for telecommunications companies has cooled, and many of the well-capitalized telecoms are down from their high prices during the first half of this year. Meanwhile, the operating results of those telecoms aren’t causing any excitement on Wall Street as they struggle to keep earnings on a par with last year’s levels.

So rather than buy individual companies, consider some of the telecom exchange-traded funds, such as Vanguard Telecommunications Services (VOX-$98), which is plus 13.3 percent year to date, yields 2.8 percent and, in the past dozen months, has traded between $75 and $101; iShares U.S. Telecommunications (IYZ-$33), which is plus 11.4 percent year to date, yields 1.9 percent and, in the past 12 months, has traded between $24 and $35; and SPDR S&P Telecom (XTL-$69), which is plus 17.7 percent year to date, yields 1.1 percent and, in the past 52 weeks, has traded between $46 and $69. These ETFs own small related companies you’ve never heard about, including Infinera, F5 Networks, Lumentum and Zayo Group. And that’s where their potential profits are coming from.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.


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