Regulated monopolies aplenty operate in the U.S. and around the world. In general, governments keep these businesses from putting their customers over a barrel and regulating prices and service levels, while the companies settle for a solid return without fear of competitive entry. Many others also either have such strong competitive positions or operate in just the right niche as to be virtual monopolies, and they can often make huge profits. And if they don't take it too far and kill the golden goose, they can keep these virtual monopolies going for a very long time. Either way, monopoly enterprises can make for solid investments, particularly if they're able to pay shareholders an above-average dividend yield.
We asked three of our contributing investors to give us a closer look at a high-yield stock with a virtual monopoly, and they gave us a surprising mix: a telecom whose monopoly business isn't the key to its future success in CenturyLink Inc. (LUMN -4.97%), dominant aerospace behemoth Boeing Co. (BA -2.13%), and Latin American airport giant Grupo Aeroportuario del Pacífico (PAC -1.48%).
The monopoly is old news: It'll take something new to keep this dividend afloat
Jason Hall (CenturyLink Inc.): One of the biggest telecom and networking companies in the U.S., CenturyLink operates as a monopoly telecom provider in many of the communities it serves. This made it a remarkable investment through the late 1980s and 1990s, when its stock price increased more than 1,000%. However, the nearly two decades since then have been largely up and down for shareholders, as increased competition and the shift away from wireline connections has steadily eroded the value -- and cash flows -- of CenturyLink's local monopolies.
It has also made it hard for the company to raise its dividend. To the contrary, the last increase happened in 2010, and the payout was actually cut back in 2013 and has been held steady since then. But with its stock price down, CenturyLink yields a mind-boggling 12.4% at recent prices. That's an incredibly heady payout, even if it isn't slated to go up.
CenturyLink's annual dividend expense, though, has exceeded the cash flows needed to pay it for years, a signal that a cut could be required. Management has a plan, tied to its recent merger with Level 3. The bosses at the "new" CenturyLink say supporting the dividend is a major focus, and the Level 3 merger is expected to generate enough combined cost savings and cash flows growth to keep the dividend afloat.
I won't beat around the bush: There's no guarantee they will pull it off, and it's obvious the market doesn't think the dividend is safe. Furthermore, big mergers rarely produce the cost-savings management promises when they're trying to sell investors on the deal. But sometimes they do, and if CenturyLink turns out to be one of those rarities and management does indeed save the dividend, it could be an incredibly lucrative income investment for years to come.
Fly higher with this aerospace stock
Dan Caplinger (Boeing): You might not think of a stock yielding 2.1% as qualifying as high-yield, but you have to keep in mind that Boeing shares have roughly doubled over the past year. That's enough to send a dividend yield plunging even when there's solid growth in the underlying payout, and Boeing hasn't failed its shareholders on that count, delivering a 20% boost in its quarterly dividend last month. The aerospace giant now pays more than three and a half times what it did as recently as 2013, reflecting the huge success that it has had in pulling in new business.
Boeing doesn't have a monopoly, but few would argue that it doesn't share a duopoly with Europe's Airbus. Other companies produce smaller commercial aircraft, but among U.S. companies, only Boeing offers the full breadth of models that airlines can use to develop a viable fleet. The strength of the airline industry has Boeing's commercial business gaining altitude quickly, and expected boosts to the military budgets of the U.S. and other countries in response to rising geopolitical tensions should help the defense contractor's military aircraft business as well.
Boeing might not have another short-term double ahead of it, but further gains are possible as long as conditions in the aerospace market remain favorable for the industry giant.
A true monopoly
Brian Feroldi (Grupo Aeroportuario del Pacífico): Building an airport is no small task. Even if you manage to acquire a huge plot of land near where people want to fly, there is still a huge amount of red tape that needs to be overcome before building can even start.
These factors tend to severely limit the number of airports that can be built around any given city. As a result, existing airports turn into local monopolies that act as toll booths on local travel. These realities have helped turn Grupo Aeroportuario del Pacifico -- which is better known as GAP -- into a fantastic long-term investment.
GAP owns or operates 13 airports in Mexico and the Caribbean. This includes popular tourist destinations like Los Cabos, Puerto Vallarta, and Montego Bay as well as a few Mexican business hubs like Tijuana and Guadalajara.
So how does GAP earn money? About 62% of its revenue comes from regulated sources (which mostly includes landing and passenger fees) while the remaining 38% comes from non-regulated sources (retail stores, car parking, advertising, ground transportation, and more). As a result, the company pulls in more revenue by simply increasing the number of passengers that travel through its airports.
Looking ahead, the demand for travel in the region should continue to pick up as economies grow and more tourists flock to the area. That positions the company well for modest revenue and profit expansion. That's great news for income investors because this company has a long history of sharing profits with investors in the form of a dividend. While the payout can fluctuate from year to year with exchange rates, shares currently yield 5.6%. That's quite attractive for a business that is basically a legal monopoly.