Iowa Telecommunications Services Inc.IWA

Morningstar Rating

Stock Research and Analysis

by Michael Hodel, CFA

Iowa Telecom dominates most of the markets it serves, allowing it to produce strong, fairly stable cash flow and pay a large dividend. We wouldn't base an investment decision on the current dividend payout, however. While Iowa Telecom will probably hold on to more market share than many of its rural peers, we still believe the steady shift toward wireless services and new technologies will erode the firm's customer base. Read more

Bulls Say

Iowa Telecom faces few competitors across its deeply rural territory, and much of the competition it does face is subpar relative to that seen in urban markets.

While demand for fixed-line phone service has declined steadily in recent years, Internet access and other data services have picked up some of the slack. As long as Iowa Telecom continues to provide services its customers want and need, its competitive position should enable cash flow to remain strong.

Management's commitment to the $1.62 per share annual dividend ensures that remaining free cash flow will be used wisely.

Where Iowa Telecom does face competition, it has been able to respond effectively--increasing Internet access speeds, for example--without sharply increasing its capital budget.

Iowa Telecom is in a position to roll up smaller telecom operators and run them more efficiently. Around 150 small carriers serve 230,000 customers around Iowa, and the firm recently entered Minnesota via acquisition. Read more

Bears Say

While the current economic downturn and housing bust may not hit rural Iowa as hard as other areas, longer-term economic and demographic trends in many areas the firm serves aren't great.

The firm gets little explicit subsidy support but still depends on per-minute access fees for a significant portion of revenue and an even larger percentage of cash flow. As the number of phone customers declines, this high-margin revenue stream will shrink as well. Regulators may also lower rates.

Iowa Telecom's network is incapable of providing high-speed Internet access service to nearly one fourth of its customers. Lawmakers or regulators could look at the firm's wide margins and cash flow and threaten the current regulatory structure if the firm doesn't build to these customers.

Wireless technology is a major competitive threat on the horizon. Iowa Telecom has purchased spectrum covering nearly 85% of its customers, but building networks could hurt cash flow. Read more

Strategy

Iowa Telecom's dividend defines its strategy, with decisions made in an attempt to preserve cash flow needed to make this payout. As the firm loses phone customers, it aims to add additional services, primarily high-speed Internet access, to increase revenue from those who remain. Read more

Management

Iowa Network Services, a consortium of 127 independent rural phone companies in Iowa, created Iowa Telecom for the purpose of acquiring the Iowa assets of GTE (now Verizon VZ). INS was initially Iowa Telecom's largest shareholder, holding about 20% of shares outstanding, but the organization reduced its stake to 3% in early 2007 and is no longer a major shareholder. Read more

Profile

Iowa Telecom provides fixed-line telecom services, primarily in rural Iowa. As the incumbent phone company in about 440 communities, it provides local service to about 214,000 lines, long-distance service to 160,000 customers, and Internet access to 106,000 subscribers. Read more

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