I really have to hand it to Alltel (NYSE:AT). The company keeps performing well in an environment where investors aren't giving telecom stocks a ton of respect. You need only look at the poor stock performance and low valuations of Verizon (NYSE:VZ) and Motley Fool Stock Advisor pick SBC (NYSE:SBC) for proof that the market views wireline telecom as a declining commodity product.
Alltel has been bucking the telecom trend by focusing on the growing wireless market. It's funding this growth with the high profit margins it continues to earn from its wireline business, which operates primarily in less competitive rural areas. This morning, Alltel reported that its third-quarter net income was 12% higher year over year on sales that rose 20%. Back out some one-time benefits to net income this quarter, and adjust last year's sales to account for discontinued businesses, and growth was up an even larger 17%. Earnings per share, however, declined 2% from last year's performance (on a current business basis) because of the additional shares issued in the merger with Western Wireless.
More change is on the way for the company. On its conference call, Alltel stated that it is pursuing "strategic options" for its wireline business. The most likely options that the company laid out are either selling the wireline business or spinning it off to shareholders as a separate company. In addition, Alltel is selling some of Western Wireless' international telecom assets in Austria and Ireland, and plans to divest the rest of its international assets as well.
All of the divestitures could leave Alltel in the interesting position of being what I consider the best domestic pure play in wireless. Some may argue that Sprint Nextel (NYSE:S) is the best-positioned wireless carrier, but I think Alltel's stronger balance sheet, increasing free cash flow, and higher 2.6% dividend yield make it the better choice.
The company also announced this week that it was upping its dividend for the 45th consecutive year by half a cent per quarter. While this increase is small, it's reasonable given the changes to the company's revenue and cash flow streams in the coming year. With its potential for growth -- the penetration rate in Alltel's wireless markets is only 14% -- and its rock-solid dividend, Alltel looks like it will continue to offer our Motley Fool Income Investor subscribers solid returns from here.
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Alltel is a Motley Fool Income Investor selection. SBC Communications is a Motley Fool Stock Advisor selection.
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Nathan Parmelee has no financial stake in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
