ACS takes long view with dividend cut

The board of directors of Alaska Communications voted Dec. 21 to lower its quarterly divided in a move that will free up nearly $30 million in cash flow annually for the Anchorage-based telecom.

In the near-term, the decision to lower the quarterly dividend from 21.5 cents per share to 5 cents per share sent the ACS price tumbling to a new 52-week low of $3.14 as of Dec. 27.

That continued the sharp slide that started Nov. 9 after the company announced during its third quarter earnings call that dividend changes were under consideration by the board.

Shares of ACS hit a 52-week low that day of $5.60, a one-day drop of 24 percent. Over the last year the stock has declined by nearly 72 percent.

Looking to the long-term, two main factors drove the ACS board of directors to lower the dividend: the expected 2013 entry of Verizon Wireless to the Alaska market and the Oct. 27 Federal Communications Commission announcement that it would be shifting some $4.5 billion from the Universal Service Fund into rural broadband subsidies.

During its March 1 earnings call to report 2011 annual results, Alaska Communications will be unveiling its broader plan moving forward.

“We’ve been working on a three-year strategy for the company,” said Heather Cavanaugh, Alaska Communications director of corporate communications. “This is part of a long-term plan to grow the business in a couple ways. We’re looking at investing in the business and investing in customer service, training and development, and paying down debt. It’s a smart thing to do financially. It’s also a part of planning for some of the changes we are expecting.”

The FCC decision will cost ACS between $4 million and $5 million in USF revenue during 2012. Fellow Alaska-based telecom General Communications Inc. expects to lose about $5 million in each of the next two years as a result of the FCC action.

State telecoms currently receive some $205 million annually in USF high-cost support, a crucial funding source that has allowed the companies to build out wireless networks that would be prohibitively expensive without it because of the low density of customers.

The USF is paid for through charges on phone customers’ bills, with three separate funds for high-cost support, Lifeline (subsidized individual phone service) and health care, libraries and schools. The affected fund is the high-cost support, which includes both wireless and wireline.

“We believe that increasing our cash position is a prudent policy,” said Alaska Communications President and CEO Anand Vadapalli. “This action will provide a continuing dividend for our shareholders, while the company invests for the future and strengthens its balance sheet.”

As it looks toward eventual competition against Verizon’s 4G LTE network planned for Alaska, ACS will begin testing its own 4G LTE network in Anchorage during the first quarter of 2012.

ACS spent between $12 million and $15 million over the final half of 2011 building out its 4G LTE network in Anchorage. Vendor agreements for tower equipment and consumer devices are being finalized and the state’s first 4G LTE network could be turned on before the end of the quarter.

Currently, the fastest wireless networks in the state are running High Speed Packet Access-plus, or HSPA+. AT&T and GCI are running HSPA+ in Anchorage.

GCI doesn’t plan to get into the LTE space for now, while AT&T has announced intentions to build out a 4G LTE network in Alaska.

Now that the AT&T merger with T-Mobile USA is officially dead, though, a more massive wireless buildout by the company that would have delivered 4G LTE to 88 percent of the Alaska population won’t be happening.

In real-world situations, HSPA+ provides download speeds of around 3 to 4 megabits per second, whereas 4G LTE networks have shown speeds of 10 mb/s to 12 mb/s.

Although investors reacted negatively to the ACS decision, the increase to its cash position will manifest itself quickly. Alaska Communications previously paid out about $9.7 million per quarter in dividends.

The cut in dividend will save the company about $7.5 million per quarter.

The Verizon entry and cut in USF revenue spurred the ACS board to action, but another benefit to the decision will be greater cash flow to reduce its debt position. ACS has about $564 million in long-term liabilities, with annual interest expenses of about $34 million, or about $8.5 million per quarter.

Alaska Communications operations have improved over the last year after cutting payroll expenses by about 10 percent in 2010 and stabilizing its wireless segment through increased data use with greater smartphone penetration during 2011. Although growth in the segment is not as robust as the company would like, ACS has also continued to increase its enterprise revenue (business customers).

However, the company has not been able to achieve profitability as the improvements in operating income have not kept pace with the some $18.2 million per quarter in dividend and interest payments. Through the first three quarters of 2011, ACS has posted a net loss of $1.77 million on $262 million in revenue.

Although investors receive their value in ACS shares through the dividend and not as much the income statement, the loss in USF support combined with already-thin margins left ACS with little choice but to cut the dividend as its best means to strengthen the company’s competitive position.

“By proactively managing our balance sheet and making these investments, we intend to create long-term value for our investors, customers, employees and the communities we serve,” Vadapalli said.

Andrew Jensen can be reached at andrew.jensen@alaskajournal.com.