INVESTMENT REPORTER
Manitoba Telecom Services Inc. has sent a harsh reminder to investors that high-dividend-yielding utilities are far from risk-free.
The company's stock fell 3 per cent yesterday after it admitted that its financial targets for the quarter were out of reach.
Management notched down its earnings and revenue forecast, blaming the economy and weaker-than-expected results from the unit that sells services to businesses.
The yield on MTS shares has been one of the highest on the Toronto Stock Exchange, hovering near 8 per cent recently. That is an attractive number for investors desperate to push up the return on their portfolios, especially coming from a traditionally stable industry such as telecom.
But MTS's warning reiterates that those yields still come with large risk. The shares were down 8 per cent this year before the latest guidance was announced, leaving investors with no gains in that period.
The phone company is not the only high-flying dividend stock on the exchange that has failed this year to maintain a stock price to support the gains of the yield.
Its bigger rival Telus Corp. pays out a dividend of nearly 6 per cent, but the stock price has fallen 8.5 per cent since the beginning of the year.
Russell Metals Inc., which processes and distributes metals across North America, boasts a yield of nearly 6 per cent, but has seen its stock fall almost 7 per cent this year.
Power generator TransAlta Corp. offers a yield slightly above 5 per cent. Its shares have tumbled nearly double that amount since January.
Torstar Corp. also pays a dividend in excess of 5 per cent. But the publisher's shares have fallen in value by three times that amount this year.
Analysts tend to agree that MTS will maintain its annual payout at its current amount of $2.60. But the bigger question is, should it?
Greg MacDonald of National Bank Financial estimates that the company will need to borrow about $70-million to afford the dividend next year.
"Although we still believe there is little risk to the dividend, the poor guidance ahead of [third-quarter]earnings leaves little room for investors looking for any potential catalysts in the near term," he wrote in a report yesterday.
Like most of the analysts following MTS, he does not recommend the stock.
Genuity Capital Markets' Dvai Ghose calculates that the company will have to borrow between $28-million and $38-million to cover its dividend commitment this year. He says the best course for MTS remains selling its enterprise group, Allstream, but he doesn't see a deal in the near term. So instead he suggests the company cut its "unrealistic" dividend.
"This would probably put significant near-term pressure on the stock," he wrote in a report.
"However, we believe that the current dividend burden may be preventing MTS from pursuing sustainable growth opportunities that create significant near-term cash flow dilution. The most obvious example is national wireless expansion."
The company cut its revenue forecast late Wednesday by as much as $80-million to about $1.9-billion and trimmed as much as 20 cents off its share profit. It said long-distance revenue from its business unit was hit particularly hard.
"The growth businesses like wireless, broadband and converged [Internet protocol]that will define our long-term success continue to perform well despite the economy. Our legacy enterprise long-distance business, however, is declining faster than anticipated," MTS chief executive officer Pierre Blouin said in a release.
MTS's problems are more structural than cyclical, said Phillip Huang at UBS Securities Canada Inc. "We expect enterprise margins to continue to contract in the coming years as more profitable legacy revenues are replaced with less profitable growth revenues," he wrote.
MTS management's previous guidance was not realistic and the Street had already anticipated the cut, said Jonathan Allen at RBC Dominion Securities Inc. He lowered his price target on the stock to $35 from $38.