Ring up Citizens

09/24/2004 12:00 am EST

Focus:

Ivan Martchev

Editor, Vital Resource Investor and Global Viewpoints

"Remain cautious," says Ivan Martchev, editor of Wall Street Winners. "As a market observer said recently, ‘In bear or sideways markets, dividends are the cake; there is no icing.’" We wholeheartedly agree and have added a high yielding stock to our portfolio."

"We’re adding a new stock to our model portfolioCitizens Communications (CZN NYSE). The company is headquartered in Stamford, Connecticut, and was founded in 1935. It provides local, long-distance, data and Internet services, primarily to rural and suburban areas in the northeastern, central and western US, with around 2.4 million access lines. The company had a large utilities business, but these assets have been or are in the process of being sold. Hence, the company has become a pure telecom play.

"We’re adding Citizens because it offers sustainable dividends. During this summer, the company presented a new restructuring plan. The main idea is to pay out the bulk of its free cash flow in dividends. In addition, a decision to strengthen the balance sheet was made by retiring $300 million in debt. This move should save $20 million in annual interest expenses. In August, Citizens paid a special dividend of $2 as well as its regular 25 cents. Consequently, the stock price dropped, and it now represents a good long-term investment opportunity.

"Currently, Citizens offers a $1 per share dividend, which translates to an 8% dividend yield. Operations are expected to generate approximately $460 million, which will allow management to comfortably pay the regular dividend to stockholders and retain a surplus free cash flow of more than $100 million. Given the strong cash flows of the company, the dividend should be sustainable for the foreseeable future. That said, Citizens faces well known risks in the business, namely changing regulations and competition. In fact, revenues did decline by 1% last year. But management’s business model has taken into account competition threats, and we except them to stick to their new cash distribution policy."

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