Comments on: Apple’s sensible dividend A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: KenG_CA Wed, 21 Mar 2012 00:28:52 +0000 A few months ago, Olympus fired their recently promoted CEO, and said he didn’t fit in with their culture, as he was British. But he claimed it was because he asked uncomfortable questions about where the company had been spending money, and it turns out they were falsifying their accounting, and had lost hundreds of millions of dollars (it might have been billions, but it was a very material amount). For example, they had bought a face cream company for over $700M, and it was worthless. Ultimately, the COB and other execs were fired, and the multiple governments are investigating. The scale of the cover-up was shocking, as it went far beyond expense account fraud.

Most telcos and carriers’ finances are scary, but you have to believe that people will keep their phone service even when the economy tanks. In addition to DT, I also have TEO, which is small but doesn’t seem to have a lot of debt, pays a big dividend (there’s a catch with it, and I don’t know it, but I don’t have a lot invested there).

By: TFF Tue, 20 Mar 2012 22:53:26 +0000 I’m not familiar with the Olympus story? (Used to own one of their cameras, though. Was nice.)

I would invest in TEF ahead of T or VZ, but their finances are a little scary… Not that familiar with other telecoms.

By: KenG_CA Tue, 20 Mar 2012 21:50:47 +0000 As to why capex is persistently high, ask the shareholders of Olympus. OK, I’m just kidding I’m not suggesting ATT or VZ are doing anything similar to what Olympus did, just that I don’t take anything either of those two companies say at face value. They don’t provide a detailed breakdown, so I can’t challenge it, only question it.

I do believe the capex will slow down, as the rate of technology changes slows down, and they saturate the market. They still are not close to mass adoption of smartphones, so that might take a few years.

Question 3 – People overpay for all kinds of stuff, I don’t see why bad service should be exempt.

I think people invest in those businesses for the dividends, and the potential for growth. I do own shares in many telecoms (including T-Mo’s parent), but they are less ethically challenged than the big two, and in countries that have more potential for growth.

Connectivity is a commodity, but the sellers don’t see it that way, and insist on packaging it with things that people are forced to buy. If the carriers and cable companies had their way, all networks would be walled gardens, where they control the content being distributed over it. I think it’s crazy, especially when it comes to distributing video entertainment, as there is less risk and lower cost in letting third parties sell content over your network, rather than trying to pick winners. I agree that neither VZ nor ATT is the company I would want to manage a commodity, but they know how to use political and economic power to maintain control of the commodity they sell.

I don’t’ think high-speed rail should be universally deployed everywhere in the U.S., but it makes sense for short distances that are now mostly served by air. While I like the idea of traveling across the country in 10 hours on a train, that may be hard to justify, but a 90 minute train ride from LA to SF is not, or between NY and DC.

And you don’t have to sell me on electric vehicles. :-)

By: TFF Tue, 20 Mar 2012 21:26:04 +0000 Also, KenG, the US isn’t Europe. Very small portions of the country are densely populated — the Northeast Corridor and California. In both of those we have active rail transit, including fairly-high-speed rail service from Boston to Washington DC.

The rest of the country? Rail service isn’t economic. Worse, it is only barely more energy efficient (at typical ridership levels) than medium-haul air travel. Some hints, even, that the latest generation of hybrid and electric vehicles will be MORE energy efficient than mass transit.

Hints at the dilemma here, but isn’t a terribly new idea: kes/without-ridership-public-transit-fai ls-at-energy-efficiency/12623

Ultimately the best way to save energy on travel is to travel less. Whether you choose a car, train, or airplane matters far less than the distances involved.

By: TFF Tue, 20 Mar 2012 21:16:51 +0000 I don’t know the answer either, KenG, which is why I don’t invest in the wireless network managers. If I were to invest, I would want answers to the following questions:

(1) Why is the capex persistently so high?

(2) Is it reasonable to expect that capex will fall off at some point, relative to revenue? (I don’t for a minute believe that the technology cycle is about to halt.)

(3) How the heck do the majors expect to continue charging consumers 50% more than T-Mobile for service that is barely if at all better? (And if their rates drop by a third, those fat dividends will have to go.)

Clearly somebody must see reasons to invest in these companies at these prices. Either they understand the business better than I do or they are fooling themselves with short-sighted earnings estimates and market comparisons. Time will tell.

In any case, I see connectivity as something of a commodity. Doesn’t particularly matter what the nameplate is on the carrier, just the technology in play and the level of investment in building it out. Much better to invest in brands than commodities, especially since I don’t believe in the ability of either Verizon or AT&T to successfully manage a commodity business.

By: KenG_CA Tue, 20 Mar 2012 20:41:23 +0000 realist, ok, so I was only using your comment as an opportunity to criticize the obsolete passenger rail system we have in the U.S.. Nevertheless, it’s not a fair comparison, as rail is a much more mature industry than communications, and while its economics are subject to advances in technology, it is at a much slower pace.

TFF, I can’t say what the costs of deploying 3G/4G networks are, but I know how much it costs to add a DSL line – less than six months of revenue. Since DSL only requires incremental capex (i.e., it uses existing wiring), it will cost less than deploying fiber. However, I believe Google has estimated that deploying fiber in suburban markets would cost less than $900 per line – easily paid off in less than three years, if not two (and they are putting their money where their mouth is, in Kansas City).

I know you’re not talking about DSL and fiber, but rather 3G and 4G, but they only have to run wires to one tower for thousands of potential subscribers (and with each new generation of wireless technology, they won’t have to run new wires, if they were smart enough to run fiber there in the first place). I don’t believe adding LTE base stations to existing towers is going to cost all that much.

By: TFF Tue, 20 Mar 2012 19:57:32 +0000 realist, ROE is a good metric for these purposes, if sensitive to leverage. But my greater concern is about the QUALITY of their earnings. Despite KenG’s critique of freight rail, their assets are DURABLE. Rails, facilities, and engines all have a long useful lifetime.

What is the lifetime of a 3G network? Hasn’t that technology already been pushed to the discount rack, after just five or six years? Technology businesses must necessarily amortize their costs MUCH faster than railways.

By: realist50 Tue, 20 Mar 2012 19:32:14 +0000 KenG – not sure what other countries you are referencing with your rail comment, though I suspect Europe. The freight railroads in the U.S. are probably the foremost freight railroads in the world – your comment sounds like it is focused on passenger rail. I don’t believe that any country in the world uses high speed rail to move freight.

Europe (EU) freight rail moves fewer ton-kilometers than Canada, and a fraction of the U.S. About 70% of EU freight moves by truck, and for the EU trucking share increased (and rail freight decreased) from ’95 – ’06. Rail freight in Europe is rather analogous to passenger rail in the U.S. -Statistics

By: KenG_CA Tue, 20 Mar 2012 18:22:07 +0000 TFF, I can’t say for certain, but intuitively, building out a wireless network is much less per subscriber than a wired one. The cells are cheaper than DSL or fiber switches, and you don’t have to dig up trenches or ouse other expensive techniques to get the fiber or copper in the ground. And one cell can support thousands of users, while you need a lot more hardware for thousands of wired users.

LightSquared was going to build an LTE network that they would wholesale out – but it was dependent on using spectrum that supposedly interferes with GPS operations, so their plan is in doubt now. One of their big customers was going to be Sprint, which unfortunately invested in WiMax for 4G, because they didn’t want to wait for LTE (they were essentially punished for trying to accelerate the adoption of technology). Sprint just backed out of that deal, as it doesn’t look like LS is going to make it happen.

realists50, I get your comparison to railroads, but it’s not entirely fair. The railroads in the US refuse to modernize, which is why they run so much slower than they do in other countries. None of them want to invest in new rails, maybe in the other countries, the government subsidizes that, but the U.S. stubbornly insists on only (seriously) subsidizing air and auto travel.

By: realist50 Tue, 20 Mar 2012 17:51:08 +0000 TFF and KenG, I view return on equity as a good metric in analyzing a capital-intensive business. Verizon’s trailing ROE is 11.8% – decent but far from exciting. AT&T’s trailing ROE is 3.8%, which is anemic but depressed by the 1-time charges from break-up fees on the T-Mobile deal. The analyst consensus forward EPS implies an ROE of about 14%, which I’d also put in the range of OK but not too exciting.

To compare both of them to a company in a different capital-intensive industry, Union Pacific’s ROE is 18%. Recall that upon purchasing Burlington Northern, Buffett described the railroad business as a good business but not a great business, due to capital requirements. Railroads are also less vulnerable to technology changes than mobile telecom.