The 8.3% Preferred Dividend Of Telephone And Data Systems Has Become Safer But Not Entirely Safe

Core Viewpoint - The preferred stock of Telephone and Data Systems has seen a significant decrease in yield from 13.0% to 8.3%, but the safety of the preferred dividend has improved due to a strategic asset sale, despite ongoing challenges related to debt and company size post-transaction [2][4]. Group 1: Transaction and Financial Impact - Telephone and Data Systems has approved the sale of US Cellular's wireless operations and approximately 30% of its spectrum assets to T-Mobile for $4.4 billion, which includes cash and debt [8]. - The deal is expected to close in mid-2025, but significant hurdles remain, including potential antitrust scrutiny from U.S. regulators [1]. - The company will become much smaller after the sale, raising concerns about its ability to maintain preferred dividends in the long run [2][1]. Group 2: Dividend and Yield Analysis - The preferred dividend yield has decreased from 13.0% to 8.3%, but the recent asset sale has made the preferred dividend much safer in the short term [2][4]. - The company pays $70 million annually on preferred dividends, with total preferred equity of $1.07 billion, indicating that preferred equity comprises 21% of total equity [8]. - The reduction of the common dividend by 79% is expected to save about $66 million per year, aiding in covering preferred dividends [8]. Group 3: Interest Rate Environment - High interest rates have pressured preferred stocks, but inflation has decreased from a 40-year high of 9.1% to 3.0%, leading to expectations of interest rate cuts by the Federal Reserve [5]. - The Fed's guidance suggests a potential reduction of interest rates from 5.25%-5.5% to 2.75%-3.0% after 2026, which could benefit the preferred stock [5]. Group 4: Debt and Financial Struggles - Telephone and Data Systems has faced challenges in servicing its debt, with net interest expenses rising 48% from $157 million in 2022 to $228 million, exceeding operating income of $191 million [9]. - The company carries a net debt of $6.5 billion, nearly triple the market capitalization of its common stock, indicating a high debt burden [9]. - The recent financial struggles have led to a significant reduction in the common dividend after 49 consecutive years of growth [7].