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Ring it Up

Neil George
Neil George
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There's more to the rural life than just peace and quiet. Now there's even more cash being sent to make those in the hinterlands just as wired as those downtown.

From the days of the Louisiana Purchase to Seward's Folly, we've always been a nation bent on expanding. And that expansion also means development.

The Universal Services Fund (USF) was created under federal law and mandates that telephone companies contribute revenues to fund the development of phone lines and services to every corner of the union.

While companies (including Income Portfolio denizen Verizon) don't have to pass the tax on, they do as a line item on all of our phone bills--listed typically as the Universal Connectivity Fee.

That tiny fee adds up to billions. And alongside the US Dept of Agriculture's (USDA) Rural Development Division, this pile of cash flows to a collection of telephone companies not only to install equipment but also to maintain services, which many rural markets wouldn't necessarily be able to justify under a pure free-market system.

Being connected isn't just about having a landline phone these days. We're now demanding wireless communications as well as high-speed access to the Internet. This has led to a big initiative by the USDA and the Federal Communications Commission (FCC) to fund the broadband communications initiative Community Connect. Under this initiative, we're all going to pitch in more on our phone bills, as well as more tax dollars, to build and maintain both wired and wireless high-speed Internet connec-tions for those living the rural life.

Pay to Play

The first big wave of the new program is about to kick in for phone and communications companies serving rural markets. Just days before

Christmas, the USDA announced its list of recipients by state and project.

Participants will get big boosts to their communications connection businesses. As you might imagine or expect, we're already on board one of the best in the rural business--Growth Portfolio member Otelco.

Otelco is one of the first of the Income Deposit Securities (IDSes) that we bought--more than a year ago as a matter of fact--and has been joined by three other IDSes inside the Growth Portfolio in unrelated but also cash-heavy businesses.

Since then, we've racked up total returns amounting to nearly 15 percent. And we're far from done. The Community Connect initiative will only see more cash and business bestowed upon this key rural operator, making it both a big payer for us with its 10-plus percent dividend, as well as a potential takeover play. Keep buying Otelco first up to 17.

After you've bought our favorite, we identify a handful of the next best rural operators below. Each of these is already a big payer with similar dividend streams as Otelco. And each of them is expected to get a big piece of the pending federal pile of cash in the many months to come.

Local Heroes

Valor Communications is grabbing the wireline assets of Alltel. The company will expand on its base of rural and urban services in the south central and western states.

After packaging its various local operations, it went public last February. Since then, it's committed to pass through the bulk of its Steady Eddie cash flows was helped by the broadband initiative. Valor, with a dividend yield above 11 percent, is a buy under 13.

Consolidated Communications came to the market in July. The company put together a collection of service operators outside the major urban areas in Texas and Illinois.

The result is a big pass-through dividend of nearly 12 percent, which like the others, will get the same boost from broadband dollars. And eventually, the company will make for a great grab by one of the major national or regional telecom companies. Consolidated is a buy under 14.50.

Pennsylvania and Iowa host two other firms that offer similar steady businesses. Commonwealth Telephone Enterprises was part of an older collection of public telephone companies in the US and Canada; that group worked with and through the old AT&T (aka "Ma Bell") before its break-up. It now operates primarily in Pennsylvania. Iowa Telecommunications is exactly what it sounds like, providing landline services, as well as wireless and Internet services, to all that farmland in the Midwest. Commonwealth is a buy up to 37 and sports a 6 percent yield; Iowa Telecom is a buy up to 18, with its 10 percent dividend.

Last is a more speculative payer in the rural connection business. Unlike the others, Fairpoint Communications isn't as focused; it has operations scattered around the nation. Its attraction is the cash cow nature of its assets, which might make it more interesting as a takeover candidate than our other favorites. Buy Fairpoint in batches below 14 and collect the 14 percent dividend along the way.

Neil George will be available to take your questions until Monday, January 9. Please use the form below to submit your questions.

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