The FTSE 350's Largest Yield

Published in Company Comment on 3 November 2011

Today's maintained dividend supports a 12% income.

The market has been treating Cable & Wireless Communications (LSE: CWC) as if its dividend can't possibly be maintained. After all, its slightly bigger brother, Cable & Wireless Worldwide (LSE: CW), recently lopped 50% from its payout.

In fact, CWC is the highest yielder within the FTSE 350 index. This side of the old Cable & Wireless provides full-service telecom services from exotic locations around the globe.

And exceedingly high yields are, of course, dangerous beasts. They generally indicate trouble ahead. But Thursday's half-year results from CWC once again appear to show that things are in good order. Indeed, CWC confirmed its dollar-denominated interim dividend had been maintained and forecast its full-year payout would be upheld, too.

Crazy yield

In early trade, the shares had responded accordingly, putting on almost 16% to 42.3p. At such a heady valuation, the shares are now set to yield a mere 11.9%, compared to the near-14% prospective yield at yesterday's close.

Among CWC's operations, Jamaica has its difficulties, but all the group's other businesses are reportedly performing well, helped by growth in mobile internet use.

CWC managed to increase its underlying net profits and sales, and announced it has agreed new five-year borrowing arrangements for $600m with nine international banks at 2.5% over LIBOR.

Again, this tends to suggest that CWC has a nicely sustainable business, which sits at odds with what the share price and dividend yield are still telling us.

Brokers see full-year earnings surpassing 2.9p per share, rising to 3.5p per share next year and placing the shares on a prospective P/E of 12.

Huge director deals

CWC is by no means risk-free of course. As you might expect, dividend cover is somewhat low, gearing looks quite high and net assets of £426m drop to £72m stripping out intangibles, versus a market cap of £1.1bn.

In other words, you really have to believe in the sustainability of the business. But today's results -- especially the sustained dividend -- help investors to do just that.

I also take comfort in the fact that the chairman and chief executive have been spending millions buying up their company's shares this year. It helps me trust that 'too big to keep up' yield.

More from David Holding:

> Don't miss our special report for dividend investors -- 3 Shares The Motley Fool Owns, And You Should Too -- it's free!

> David owns shares in Cable and Wireless Communications.

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Comments

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F958B 03 Nov 2011 , 4:02pm

A dividend yield of 12% is not sustainable with a 12x P/E ratio (forecasts are for an equally-unsustainable uncovered dividend next year, with a yield of 12% on a P/E of 10).

A P/E ratio of 10x can't support more than 9% yield at the most and a 6% yield would be more realistic on a 10x P/E ratio.

The market is suggesting to us that eventually the yield will be cut in half so that it can be supported by earnings and not from reserves, asset sales, accounting trickery or by taking on additional debt to pay the high yield.

With the CWC yield being offered at 12% at the moment, would it really be surprising that such a "too good to be true" yield is cut in the future?

DIYIncome 04 Nov 2011 , 7:59am

Yes F958B - and it is probably looking at what its evil twin has done (halving the dividend).

As a rule of thumb, I am wary about a yield of more than 2 times the FTSE100 average (currently around 3.6%).

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