
xijian
Investing Thesis
In February, Telephone and Data Systems, Inc. (NYSE:TDS) announced that it would be hiking its quarterly dividend by 3% from $0.18 to $0.185 per share, thereby raising its annual dividend for the 48th consecutive year. With a current yield just north of 7%, TDS appears to offer both high current income as well as a commitment to increasing dividend payouts over time. As a dividend investor, I decided to take a closer look at TDS to see whether the stock is worth adding to my portfolio or if it is a dividend trap waiting to snap shut.
Business Overview
Founded in 1969, Telephone and Data Systems, Inc. is a telecommunications company that operates through several subsidiaries, including:
U.S. Cellular: U.S. Cellular provides wireless voice and data services to roughly 5 million customers across 21 states, focusing primarily on customers in rural areas. U.S. Cellular also offers landline telephone and internet services in a few markets as well as a variety of business solutions for small to medium-sized businesses. Overall, U.S. Cellular accounts for more than 75% of TDS’s operating revenue:

Telephone and Data Systems, Inc. (TDS) – FORM 10-K | Annual Report (https://seekingalpha.com/filing/7248417)
TDS Telecom: Like U.S. Cellular, TDS Telecom maintains a strong presence in rural areas of the United States, providing DSL internet service and cable television packages to clients.
OneNeck IT Solutions: Via OneNeck IT Solutions, TDS provides cloud and web hosting solutions, security services, and managed IT services ranging from server management to end-user support.
Suttle-Straus: While Suttle-Straus began as a printing company, it has evolved into a full-fledged digital marketing enterprise. Indeed, while Suttle-Straus continues to operate a legacy offset printing arm, which provides a largely Midwestern clientele with large format printing solutions as well as packaging and label printing, it also offers a range of digital marketing services, including search engine optimization, direct email marketing, and social media engagement solutions.
The map below illustrates TDS’s primarily rural footprint:

TDS Operations (Telephone and Data Systems, Inc. (TDS) – FORM 10-K | Annual Report (https://seekingalpha.com/filing/7248417)
Diving Into the Numbers
I will just come out and say it: TDS does not look good. In the company’s most recent annual report, TDS reported a revenue of 1.36 billion dollars (down 1.09% year over year), missing Wall Street expectations by 41.38 million dollars. In terms of earnings per share, TDS disappointed an already pessimistic Wall Street by posting a loss of $0.38 per share when Wall Street estimates were at comparatively sunnier loss of only $0.36. Moreover, the net income attributable to the company’s common shareholders and related diluted earnings per share were losses of $7 million and $0.07, respectively, for the 2022 fiscal year compared to $117 million and $1.00, respectively, for the 2021 fiscal year:

Telephone and Data Systems, Inc. (TDS) – FORM 10-K | Annual Report
Perhaps unsurprisingly, given the company’s deeply disappointing numbers, TDS’s share price has severely underperformed the broader market, dropping more than 40% over the past year:

As fellow Seeking Alpha contributor, Gary Bourgeault explained in an article published last December, one of the biggest headwinds facing TDS is the growing churn (the percentage of the connections that disconnect service each month) US Cellular continues to experience:

US Cellular Operating Data (TDS Press Release: https://www.tdsinc.com/news/news-details/2023/TDS-reports-fourth-quarter-and-full-year-2022-results/default.aspx)
While the total churn rate for the fourth quarter was 1.35%, marking a modest improvement over quarter three’s 1.42%, it nevertheless remains troublingly high given that the churn rate accompanies an ever-dwindling market share for U.S. Cellular, whose already miniscule foothold in the cell phone marketplace has dropped from 2% in 2011 to 1% today:

Statista: https://www.statista.com/statistics/199359/market-share-of-wireless-carriers-in-the-us-by-subscriptions/
Given that U.S. Cellular accounts for more than three-fourths of TDS’s revenue and knowing that it has been unable to gain market share from major players in the telecommunications space such as Verizon (VZ), AT&T (T), and T-Mobile (TMUS), TDS appears to be particularly vulnerable to the encroachment of its more well-heeled competitors into U.S. Cellular’s rural strongholds.
Is The Dividend Safe?
If, as the old adage goes, the safest dividend is the one that has just been raised, then TDS’s dividend is safe since it paid its newly-hiked dividend just three days ago. Even Seeking Alpha‘s Dividend scorecard for TDS looks pretty good:

Seeking Alpha: https://seekingalpha.com/symbol/TDS/dividends/scorecard
However, TDS’s dividend very likely represents a value trap. While the company appears to be dedicated to maintaining and even hiking its dividend, TDS’s payout ratio has climbed into the stratosphere:

Indeed, TDS has taken on substantial debt to fund the dividend:

As a result of such policies, S&P rates TDS as having BB junk bond status. So, while the dividend may be safe for the time-being, maintaining it for much longer may prove too much for a company with so much riding on an unpopular cellular carrier in an oversaturated market. Unless TDS can somehow find a way to compete with more established telecommunications companies, the dividend is likely at risk in the medium to long term. Unfortunately, the dividend appears to be the only reason to even consider investing in TDS. Indeed, over the past three decades TDS’s total return is anemic when compared with Verizon, AT&T, and T-Mobile:

To wit, a $10,000 investment in TDS in 1993 would be worth $10,665 today for a compound annual growth rate of–wait for it–0.2%. If we adjust for inflation, that investment would be worth $5,059 for a CAGR of -2.23%. By contrast, the same $10,000 invested in AT&T would result in $56,027 today for a CAGR of 5.88%. When adjusted for inflation, that would still be $26,574 with a CAGR of 3.29%. And a $10,000 stake in Verizon would be $63,835 today for a CAGR of 6.34%. Adjusted for inflation, that would still be $30,278 with a CAGR of 3.74%. In other words, even with dividends reinvested, TDS has been a way to lose money for three straight decades.
Parting Thoughts
As a dividend investor, I tend to value income over price appreciation, but even with a dividend yield north of 7% and a half century’s worth of annual dividend hikes under its belt, TDS does not strike me as a good investment. While U.S. Cellular is certainly not the only aspect of TDS’s business, it nevertheless is the main source of recurring revenue for the company. While its broadband and cable television services will no doubt continue to bring in some cash, TDS simply does not appear equipped to compete with the bigger players in the telecommunications sector and, as such, seems destined either to be acquired by a competitor or to continue catering to its rural niche. Either way, growth seems unlikely and, given the company’s disappointing history, I am not willing to bite even as the share price lingers around $10. For investors seeking income from telecommunications, Verizon remains an attractive option with a similar yield and substantially lower debt while offering significantly better chances for capital preservation and growth. By the same token, T-Mobile offers a nice opportunity for growth and the potential for future income should the company eventually pay a dividend. I rate TDS stock a sell.