Description

North State Telecommunications could be described as a value trap.  I have owned the company since it was first written up on VIC by Max686 in 2006.   The stock trades today …eight plus years later ….at the same price.  However, I have collected dividends equal to 68%.  During the same time the S&P 500 is up 45%.  If you include dividends the S&P is up about the same 68%.   At the current price the annual dividend is 7.6%. 

With North State, I think an investor is buying the underlying assets of the company at a discount to private market value.  However, I have no illusions of this being realized and, therefore, this idea is only appropriate for someone that wants to own the company on a long term basis for the dividend.  In today’s world a 7.8% annual return in the form of a dividend with underlying assets that trade at a discount to private market value is rare.  More common are high dividend stocks (like most REITs or MLP’s) that carry high leverage and trade at historically very high multiples to value.    

Further, North State is no longer a melting ice cube in the form of an old line telephone company.  Two thirds of revenue now comes from business lines that are growing, with one-third of revenue in old line residential and wholesale telecom.    

The stock has a market cap of approximately $155 million, but trades slowly and therefore is only appropriate for individuals and smaller funds.  Also worth mentioning is that it trades on the grey market, holds no conference calls and provides limited reporting.  Quarterly and annual financial reports are available on the company’s website:  https://northstate.net/shareholder-news.   The B shares under NORSB (the non-voting stock) are shares that trade.   The voting stock is mostly held by the founding family.  The Chairman is the grandson of the founder and the CEO is a great grandson.  I take comfort in the fact that any change in the long tradition of the generous dividend would likely be a lot more off- putting to the many family members than me. 

Both Max and Bowd have written up NORSB so I recommend reading those for additional background on the company as well.  I will focus more on the more recent changes and current state of the business. 

North State is a regional operator with network that extends over a broad area of the Piedmont Triad Region of North Carolina with a network comprising more than 68,000 miles of high-capacity fiber optic facilities used to carry:  voice and broadband Internet services, digital TV, networking and IP services, and critical back-up and disaster recovery data for businesses. 

North State completed a fiber build out their markets in 2012.   This network now supports gigabit internet speeds and digital Fiber HD cable TV to homes and businesses.   Additionally, in 2011 they purchased DataChambers for $55 million, which now operates three facilities in Winston-Salem, Raleigh and Charlotte with a combined 150,000 square feet of data center and disaster recovery space. The newest facility in Charlotte opened in 2014, and will accelerate growth further in this business.  North State has transformed its network and services for the digital age.  Adding all the business lines up, unlike many other telecom companies, North State is in a position to grow revenue at a modest pace over the next ten years. 

I’m sure they paid full price for the DataChambers acquisition and not sure if that was the best use of capital.  I do like that they stayed within a niche geography and Triad market where they have operated for over 100 years. 

In 2013 North State sold its wireless phone operation to AT&T for $23.5 million and used the proceeds mainly to expand the broadband and data center businesses.  This appeared to be a decent return on capital invested given the sale. 

North State also has done very well with another asset they own.  A 5.81% partnership interest Alltel Communications of North Carolina, LP.   Alltel was sold to Verizon so the partnership is run by Verizon now.  This regularly produces cash distributions to North State in the range of $7.5 million per year. 

Valuation

Valuation is mainly to show that the dividend is well supported by the underlying business and that the assets supporting the dividend provide a margin of safely.  Below is a spreadsheet with some of the particulars.   At the present trading price at $67 I think that the asset value is currently in range of $80 per share and will rise to $110 per share in next couple years, based on stabilization and slight growth in revenue from broadband, cable and digital business services. 

The operating business produces $28 million in EBITDA.  I use a multiple of six times to value the business.  I think the different segments would be valued differently.  The landline business at three times, broadband and cable at seven times, and data center at nine times.   I value the Verizon wireless partnership based on a 10% yield on distributions.   Total cash including Verizon payments are in range of $36 million.  Current CAPX is around $16 million.  This has come down after the completion of the fiber upgrade.  The after tax cash FCF yield is in range of 10% to 12% with 7.8% being paid out in form of dividend. 

While this investment has not been the best one in my portfolio, it has certainly done better than some.  I plan to hold it for many more years at the present time and enjoy the steady dividends.

Catalyst

None.