AUG 10, 2001
This Stock Pays 21% in Dividends, but Few Are Interested
HE business is declining, with new competitors and technological trends that could eventually destroy the industry. Many companies have better growth prospects. But even with all those problems, you might think that a 21 percent dividend would entice investors.
That amazing yield is available now on a new security that carries a household name: MCI. The number is that high because Wall Street is bored with a simple thing like yield and because there are doubts that the company can continue to pay the dividend forever. But you don't need forever to make money with income that high.
MCI's new stock is a tracking stock issued by WorldCom (news/quote), which merged with MCI a few years back. The stock is supposed to track the performance of MCI's business, largely consumer and small-business long-distance service, and it sports a $2.40 annual dividend.
When the shares began trading in June at around $18, that produced a yield of 13.3 percent. Now, with the stock down to $11.18, the yield is 21.5 percent.
This stock exists because WorldCom wanted to spice up investor interest after its planned merger with Sprint fell apart and its own stock plunged. The idea was that WorldCom stock, freed of the stodgy, old long-distance business, would appeal to growth investors, while the new MCI would attract those interested in high dividends.
So far, the idea has not worked very well. Since the spinoff, WorldCom is down 28 percent and MCI is off 38 percent. Some question whether MCI can keep paying the dividend. The Baby Bells are getting into long distance and revenues are falling. Virtually no one seems to like MCI.
Is the dividend safe? Yes, says Bernard J. Ebbers, WorldCom's chief executive. "Investors should be confident of our ability to service debt and pay the $2.40 dividend for the foreseeable future," he said last month.
Of course, the board can cancel the dividend when it wants to. But there is a good reason the dividend is probably safe: Mr. Ebbers needs the money, and the board seems determined to do what it can for him.
Mr. Ebbers is the man who built a tiny company into a giant and was, for a time, a billionaire. But he seems to have lived a bit too well, borrowing money against his stock when it was riding high. He now owns WorldCom and MCI stock worth $238 million, which sounds like plenty. But he owes more than $268 million on loans secured by that stock. In other words, he is in the hole for about $30 million.
Of that debt, $183.7 million is owed to Bank of America (news/quote), and would become due immediately if Mr. Ebbers left WorldCom. The rest is owed to WorldCom, which charges him just 5.3 percent interest. (In contrast, WorldCom apparently figures that MCI's credit is not as good. In balancing the internal company accounts, WorldCom assesses MCI an interest rate of 8.4 percent.)
Mr. Ebbers, who declined to be interviewed for this column, will receive $1.7 million a year in dividends on his MCI stock. It seems like a reasonable bet that he and his board will do their best to keep the cash flowing.
It is not just the board's willingness to extend low-interest loans that shows how beloved Mr. Ebbers is to it. Last year, when WorldCom's plunging stock price led the company to cancel bonuses for most top executives, his was raised to $10 million. It was, the board explained, a "retention bonus." Since Mr. Ebbers cannot afford to quit — at least not until the stock rises sharply — one could conclude the board was just being nice to an old friend in need. |
