Three Stocks That May Get Government Money to Supply the Internet

By Trey Thoelcke Published Apr 25, 8:40AM EDT

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Most of us are so accustomed to having the Internet around and on 24/7, that we hardly give it a second thought. From the connection in our home to the Wi-Fi in the Starbucks to the data plan from our carrier, the ubiquitous Internet is always on and ready to go. However, many people live in remote areas of the country not served by the major carriers or a cable company. The Federal Communication Commission (FCC) recently released a report and order for its Connect America Fund (CAF), known as CAF Phase 2, to determine the costs of serving broadband in census blocks for the so-called price cap carriers.

Each price cap carrier will be offered financial support in exchange for commitment to serve locations that are within the “high-cost-range” and are not currently served. The FCC tentatively sets the benchmark at $52.50 per location and $207.81 for an extremely high-cost location. The rural local exchange carriers, or RLECs, will have the right of first refusal on receiving this support. While the carriers have already received a $300 million distribution for Phase 1 of the plan, the second phase is expected to be $1.8 billion.

Here are the three companies that will receive government funds, or taxpayer money if you prefer, to supply the Internet and broadband service to more remote and hard-to-get-to locations.

CenturyLink Inc. (NYSE: CTL) is expected to get the largest chunk of the money at $497 million. This compares to $350 million in frozen support they received in 2013. The company is one of the largest telecommunications firms in the United States and a global leader in cloud infrastructure and hosted IT solutions for enterprise customers. Investors are paid an outstanding 6.3% dividend from the company, which looks to be sustainable. The Thomson/First Call price target for the stock is $33.55. CenturyLink closed Thursday at $34.63.

Frontier Communications Corp. (NASDAQ: FTR) stands to receive $303 million from the government, should it choose to participate. The company received support of $150 million in 2013. It offers broadband, voice, satellite video, wireless Internet data access, data security solutions, bundled offerings — including specialized bundles for residential customers, small businesses — and home offices and advanced communications for medium and large businesses in 27 states. Investors receive a large 6.8% dividend. The consensus price target on Wall Street is at $5.25. Frontier closed trading Thursday at $5.81.

Windstream Holdings (NASDAQ: WIN) will be the third place winner in the government money distribution sweepstakes with a reported $188 million for this year, versus last year’s $156 million. The company is a leading provider of advanced network communications, including cloud computing and managed services, to businesses nationwide. The company also offers broadband, phone and digital TV services to consumers primarily in rural areas. For years, Wall Street firms have questioned the ability of the company to maintain its huge 11.3% dividend. The fact that it has not been increased in the past five years means maintenance may prove difficult, if business was to turn down drastically. The consensus price target is $8.34. Windstream closed Thursday at $8.99.

In the UBS research report in which this data was presented, the analysts speculate that if the carriers elect to receive these funds, and who would be surprised if they did, there could be a substantial boost in free cash flow. In fact, for Frontier they estimate the number could be as high as 20%, while 5% to 7% for the other two. Investors do not often get the government boosting the business in the stocks they hold, so one of these names may be a nice addition to an income portfolio with some elevated risk tolerance.

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About the Author Trey Thoelcke →

Trey has been an editor and author at 24/7 Wall St. for more than a decade, where he has published thousands of articles analyzing corporate earnings, dividend stocks, short interest, insider buying, private equity, and market trends. His comprehensive coverage spans the full spectrum of financial markets, from blue-chip stalwarts to emerging growth companies.

Beyond 24/7 Wall St., Trey has created and edited financial content for Benzinga and AOL's BloggingStocks, contributing additional hundreds of articles to the investment community. He previously oversaw the 24/7 Climate Insights site, managing editorial operations and content strategy, and currently oversees and creates content for My Investing News.

Trey's editorial expertise extends across multiple publishing environments. He served as production editor at Dearborn Financial Publishing and development editor at Kaplan, where he helped shape financial education materials. Earlier in his career, he worked as a writer-producer at SVE. His freelance editing portfolio includes work for prestigious clients such as Sage Publications, Rand McNally, the Institute for Supply Management, the American Library Association, Eggplant Literary Productions, and Spiegel.

Outside of financial journalism, Trey writes fiction and has been an active member of the writing community for years, overseeing a long-running critique group and moderating workshop sessions at regional conventions. He lives with his family in an old house in the Midwest.