The Teleco Tundra Is About to Heat Up

Alaska Communications Systems (Nasdaq: ALSK  ) had a better fourth quarter in 2011 than it did in 2010, and all of 2011 turned out better than the previous year. The company voiced optimism for 2012 in its earnings conference call, expecting revenue to come in between $355 million and $365 million, up from $349 million for 2011 and $342 million in 2010.

But there will be some major headwinds coming up for the company to contend with.

Not another one!
First, Verizon (NYSE: VZ  ) has indicated that it will be expanding out of the lower 48 states to throw its hooks into an already overfished population. That is expected to happen near the end of 2012. This would be the second major national carrier to invade this territory. AT&T (NYSE: T  ) took a 60% share of the market when it gobbled up privately held Dobson Communications in 2007.

Verizon's entering the market also adds to Alaska Communications' problems in another way. Verizon has been paying substantial roaming fees to the carrier. Once in Alaska on its own, Verizon will surely take that source of income away from the incumbent carrier. At the least, it will reduce it significantly.

Shrinking subsidies
Another threat to Alaska Communications' future health is of a regulatory nature. A federal rule has changed that helps fund the greater expense of serving a widely dispersed rural population. That rule now reduces the money the Alaskan telecoms will receive. According to Anand Vadapalli, the carrier's former COO and now CEO, those Verizon revenues and the subsidy money "represented $84 million, or 24% of our 2011 revenues." He added: "These revenues will not go to zero. However, over several years, good portions of these revenues are at risk."

A dividend reduction
Alaska Communications has been one of those telecom stocks that has attracted investors with a very generous dividend. For the past five years, that dividend has provided a yield that averaged close to 13%. Alas, that is no more. Faced with high leverage on its debt, and free cash flow dipping into negative territory, the company drastically lowered its dividend for the quarter. The $0.20 per share it had paid out was reduced 75% to $0.05. But despair not; it still yields close to 6%.

Alaska Communications took this angst-inducing action because it is going to need all the cash flow it can eke out. For its own survival in Alaska's harsh telecom climate, the company plans on being the first carrier there to offer a 4G LTE network. To do that, the company estimates that it will take $15 million to $20 million out of its 2012 capital expenditure budget of between $55 million and $60 million.

Upsetting the apple cart
Before 2007, Alaska Communications was the top dog, strongly beating General Communications (Nasdaq: GNCMA  ) and Dobson as they fought over the 700,000-plus people dispersed over a very large area. But as it was winning the battle, Alaska Communications was becoming complacent. As Vadapalli said in the conference call, "We have traditionally focused our energies on 60% of the market represented by wireless and enterprise, and in the remaining 40% of the market, we've just not shown up." That other 40% comprises the markets for small and medium businesses, and consumers.

But this realization has come a bit late. Not only has AT&T bigfooted its way to the top in Alaska, but former underdog General Communications has also turned the tables on its rival. Through aggressive growth and pricing, the company has managed to increase wireless subscribership from 32,700 in 2007 to 140,200 at the beginning of 2011. Alaska Communications went from 137,500 to 116,200 in the same time frame.

Why Alaska?
The state offers only -- according to Vadapalli -- potential retail revenues of around $1.1 billion. So if it seemed strange back in 2007 that AT&T wanted in, the entrance of a fourth telecom willing to put up with the expense of chipping through the permafrost and dealing with mountain-induced cellular interference is quite puzzling.

Unless, of course, there's consolidation in the air. Alaska is a really big state, but with the two largest national carriers squeezed in alongside Alaska Communications and General Communications, all fighting for a mere 710,000 customers, I don't think it wil be too long before one or both of those smaller companies get swallowed whole.

Alaska Communications did once offer some mouthwatering dividend yields, but investors felt the pain when they had to swallow that huge dividend cut along with the company's falling stock price. For tips on 11 stocks that offer solid dividend returns with minimal volatility, get this free Motley Fool report.

Fool contributor Dan Radovsky owns shares of AT&T. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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