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High Dividend 50: Cogent Communications Holdings


Updated on July 1st, 2024 by Josh Arnold

High-yield stocks pay out dividends that are significantly more than market average dividends. For reference, the S&P 500’s current yield is only ~1.3%, which is low on an absolute basis, but also relative to the index’ historical values.

High-yield stocks can be very helpful to shore up income after retirement. A $120,000 investment in stocks with an average dividend yield of 5% creates an average of $500 a month in dividends.

You can download your free full list of all high dividend stocks with 5%+ yields (along with important financial metrics such as dividend yield and payout ratio) by clicking on the link below:

 

Next on our list of high dividend stocks to review is Cogent Communications Holdings, Inc. (CCOI).

The company has a respectable 12-year dividend increase streak. The yield is extremely high today at about 7.5%, but the safety of the dividend is far from assured.

Business Overview

In 1999, Cogent Communications Holdings was established on the basis that bandwidth could be traded and sold like any other good or service (i.e., a commodity).

The company provides small and medium-sized enterprises in 50 different countries with low-cost, high-speed internet access and private network services. The company carries a huge percentage of global internet traffic each year.

Cogent provides high-speed internet connection to two different types of consumers: corporate or “on net” customers, who account for the bulk of sales, and netcentric or high bandwidth users, who earn the balance of revenue.

With the company’s telecommunication services generating resilient and recurring cash flows, the company’s performance has remained robust over the past several quarters despite the tough market environment.

Cogent posted first quarter earnings on May 9th, 2024, and results quite weak. Adjusted earnings-per-share came to a loss of $1.38, which was 40 cents weaker than the loss of 98 cents per share that was expected. Revenue was up 73% year-over-year to $267 million, but missed estimates by almost $6 million.

Wavelength revenue was up 7% sequentially to $3.3 million for Q1. Revenue under the commercial services agreement with T-Mobile was $8.6 million for Q4, and $3.2 million in Q1. Non-core revenue declined quarter-over-quarter to $6 million from $7.3 million.

Total customer connections rose 36.4% year-over-year to 132,883, and fell from the December quarter. On-net customer connections rose 5.2% year-over-year to 87,754, and fell fractionally from December. Off-net customer connections rose by 151% to 34,579, and fell by 6% from December.

Wavelength customers were 693, up from 661 in December. Non-core customer connections were 10.037, down from 11,975 in December.

We see the company with an adjusted earnings-per-share target of 42 cents with some extremely volatile earnings performances in recent quarters.

Growth Prospects

Cogent’s earnings-per-share generation has been quite erratic over the last ten years. Earnings-per-share has hovered as low as $0.02 in 2014 and as high as $26.88 in 2023.

Income tax expenses, unrealized FX gain on euro notes, and debt redemption losses have contributed to net income’s wild swings. The bumper earnings value from 2023 was due to a bargain purchase gain from an acquisition, and not sustainable operating earnings.

The company’s performance is thus better assessed through its adjusted operating earnings generation as the metric of these one-off items, along with the company’s capital expenditures. Cogent had seen years of reasonably strong operating earnings growth, but that ended with 2023’s operating loss of $111 million.

Revenue is on the rise, and the company is attempting to get operating costs under control. These factors should help with margins over time, but we also note the most recent quarter saw very weak customer numbers, meaning top line growth and the margin expansion that could come with it are going to be tougher to come by.

We’re estimating 8% growth from 2024 levels, but this is more of a reversion to the mean estimate rather than outright growth. We’re concerned by customer losses, and see the road ahead for earnings as bumpy to say the least.

Competitive Advantages

Cogent offers narrow product sets, which can have significant cost advantages compared to telecommunication majors, whose offerings are generally broad.

The company’s transmission and network operations rely mainly on two sets of equipment, increasing control to give superior delivery. While they have tens of thousands of corporate connections, this only accounts for a 5% market share, compared to the 95% market share they own with net-centric customers.

This gives them plenty of capacity to attract new customers. Still, we note that this hasn’t always translated to big customer growth and indeed, Cogent has had plenty of time where it is ceding customers.

The fact that the corporation increased its dividend every three months during the COVID-19 pandemic should illustrate the resilience of its business model, even though the company’s ability to weather recessions in terms of payouts has not been put to the test.

Still, due to the nature of telecommunications, we would expect relatively robust results during a potential recession.

Dividend Analysis

In the last decade, Cogent has boosted its dividend by an average of about 15% annually, which is extremely impressive. Management is firmly committed to returning cash to shareholders, but we note that with recent operating losses starting to pile up, the dividend may not be that safe.

Cogent’s earnings-per-share has, at no point in the past decade, actually covered the dividend. That is the case today as well, but we note Cogent’s cash available to pay the dividend is much closer to operating earnings, rather than earnings-per-share.

Even so, trailing-twelve-months operating losses have totaled nearly $200 million, and the dividend costs about $180 million annually. With the company’s leverage employed on the balance sheet, we believe the dividend will become ever more challenging to pay.

Free cash flow was positive each year until 2023, and remains negative today on a trailing-twelve-months basis. We suggest investors keep a close eye on this as it may result in tougher conditions in terms of paying the dividend going forward.

Final Thoughts

Income investors are likely to appreciate Cogent’s 7.5% dividend yield and frequent dividend increases. Cogent’s dividend, in our view, could be at risk over time as operating earnings and cash flow numbers have deteriorated significantly in recent quarters.

Cogent’s inherently defensive business characteristics are a source of strength from a dividend investor’s perspective, but we note conditions have deteriorated for the company. The declining share price means the yield is elevated, but it could also be viewed as a warning sign about the dividend’s sustainability.

If you are interested in finding high-quality dividend growth stocks and/or other high-yield securities and income securities, the following Sure Dividend resources will be useful:

High-Yield Individual Security Research

Other Sure Dividend Resources

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