MANITOBA TELECOM SERVICES INC. $29(Toronto symbol MBT; Conservative Growth and Income Portfolios, Utilities sector; Shares outstanding: 77.8 million; Market cap: $2.3 billion; Price-to-sales ratio: 1.4; Dividend yield: 5.9%; TSINetwork Rating: Average; www.mts.ca) gets 60% of its revenue from its MTS division, which has 1.3 million telephone and wireless clients in Manitoba. The other 40% comes from Allstream, which sells telephone, Internet and other communication services to businesses across Canada.
In the three months ended June 30, 2014, the company’s revenue fell 1.7%, to $403.3 million from $410.1 million a year earlier.
The MTS division’s revenue rose 1.1%, as strong demand for high-speed Internet and TV services offset lower revenue from traditional telephones. Wireless revenue also fell 4.8%, as smaller carriers continue to develop their own networks, which cuts the roaming fees they pay Manitoba Telecom.
Allstream’s revenue fell 5.6%, as it continues to shift its clients from older phone services to integrated Internetbased voice and data plans.
The company earned $28.8 million, or $0.37 a share, in the latest quarter. That’s a big improvement over the $52.9 million, or $0.78 a share, it lost a year earlier. However, if you disregard a writedown of Allstream after Ottawa blocked its sale to a foreign buyer, Manitoba Telecom earned $0.43 a share in the yearearlier quarter.
Manitoba Telecom recently agreed to settle a lawsuit related to the funding of an employee pension plan after the company was privatized in 1997. As a result, it will pay out a total of $140 million over the next few years. It recently sold $238 million worth of new common shares, so it has enough cash to cover this cost.
The stock rose in response to BCE’s plan to buy 100% of Bell Aliant (see page 103), as investors believed Manitoba Telecom could also become a takeover target. However, the Manitoba government limits any single shareholder’s ownership in the company to 20%.
Manitoba Telecom will likely spend $295 million on network upgrades this year, down slightly from $296 million in 2013. Even after these outlays, it will have $160 million of free cash flow. That will let it maintain its annual dividend payout of $1.70 a share (5.9% yield), which would total $130 million.
The company will probably earn $1.71 a share in 2014, up 1.2% from $1.69 in 2013. The stock trades at 17.0 times that estimate.
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