High-yield/macroeconomics (fka YIELD)

[Democritus_of_Abdera]

Abreis, Re: IWA’s Aug 2008 CC and RBC Presentations

The good news is that the dividend is safe. It is paid out of cash flow that is more than adequate, largely due to minimal taxes until June 2015.

The bad news is that there is no growth. There is chronic loss of land lines (ILECs) partially balanced by increases in DSL and CLEC lines. The net land line loss is periodically remediated by incremental purchases of private rural telecoms such as the recent purchase of Bishop.

IWA continues to point out that they do not participate in the Universal Service Fund, USF (at least in any meaningful way). The USF has been a cash cow for their rural telecom peers. There is a growing consensus that the federal USF and high cost loop support of rural telephone systems will be reduced. I suspect that if and when this happens, rural telecoms in general will see their stock Price/Earnings ratios contract. I’m assuming that IWA will experience a sympathetic reduction in its stock price even though they have made it clear that loss of this federal support will have no impact on their operations.

On the bright side for IWA, loss of federal USF support will likely push small rural telecoms to insolvency making acquisitions cheaper. IWA claims that there are 150 small rural telecoms in Iowa and a smaller number in Minnesota that could be up for grabs in such a consolidation. I also continue to believe that Verizon might divest its midwest rural land lines through a Reverse Morris Trust (#msg-29791035). Thus, IWA’s strategy of maintaining cash flow through intermittent acquisitions will likely remain successful.... again supporting the dividend for years to come.

When asked what IWA plans to do with the AWS and 700 spectrum they have purchased, the CFO, Craig Knock, explained that IWA made the purchases for strategic reasons and have no immediate plans. However, the most likely scenario, when they do decide to capitalize on thier investments, is to use this wireless spectrum to support the broadband network when laying lines for DSL is not economical or to support the CLEC program (which targets business customers in the Quest marketplace).

In my summary of the May 2008 CC (#msg-29623158) I had noted that disproportionately large open interest in December 20 calls (currently 6,000+ contracts, where the expected number would be in the hundreds). Holew explained the phenomenon in his June 4th message on the Yahoo IWA message board; i.e. an investment newsletter suggested buying IWA covered calls to collect the dividend and the option premium.