MANITOBA TELECOM SERVICES INC. $32(Toronto symbol MBT; Conservative Growth and Income Portfolios, Utilities sector; Shares outstanding: 79.3 million; Market cap: $2.5 billion; Price-to-sales ratio: 2.5; Dividend yield: 4.1%; TSINetwork Rating: Average; www.mts.ca) recently completed the sale of its Allstream division to U.S.-based Zayo Group Holdings (New York symbol ZAYO).
Prior to the deal, Allstream, which offers telephone, Internet and other communication services to businesses across Canada, supplied 40% of Manitoba Telecom’s revenue. The remaining 60% came from its MTS division, which has 1.3 million telephone and wireless customers in Manitoba.
Manitoba Telecom received $420.0 million, net of transaction costs, for Allstream. The company will use $200.0 million to buy back roughly 8% of its outstanding shares. It will put a further $190.0 million to its total debt of $1.1 billion, which is equal to 44% of its market cap. The company will hang on to the remaining $30.0 million for now.
Revenue from its ongoing telecom operations rose just 0.8% in 2015, to $1.01 billion from $1.00 billion in 2014. Earnings fell 48.1%, to $60.9 million, or $0.77 a share. However, that included $38.6 million in costs related to previously announced job cuts and other restructuring actions. In 2014, it earned $117.4 million, or $1.52 a share.
The company’s recent sale of Allstream has lifted its shares, as investors feel it could become a takeover target for a larger telecom firm such as BCE or Telus. That’s why the stock now trades at high 23.2 times the $1.38 a share that Manitoba Telecom will probably earn in 2016.
Manitoba Telecom recently cut its dividend by 23.5%; the new annual rate of $1.30 a share yields 4.1%.
In 2015, the new rate accounted for a sustainable 73% of the company’s free cash flow (cash flow less capital expenditures). Moreover, the company’s restructuring should add $100 million to its annual free cash flow by the end of 2017.
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