Looks like a bad recommendation

 Dear Mr. Berko: 

My neighbor subscribes to The Value Line Investment Survey, which recommended the stock of Frontier Communications, which yields 7.5 percent, and Annaly Capital Management, which yields 11 percent. He gave me copies of Value Line’s write-ups on both stocks, and they look really good. I recently retired and am rolling over $216,000 from my 401(k), in which the choices of mutual funds are very bad, to an individual retirement account. My neighbor, who retired from the same company two years ago, recently bought $10,000 of each for his IRA. And because we need as much income as we can get, he suggested that I buy stock in each of those companies, too. I would appreciate your opinion of these two stocks. And could you also give me some recommendation of other high-paying stocks that are safe? 
— HM, Waterloo, Iowa
Dear HM: 
I remember the chorus of a song from the early 1960s by Jimmie Rogers: “Never in a hundred, never in a thousand and never in a million years.” And that’s precisely how I feel about owning either of those issues in an IRA. Jumpin’ Jack Frost, I fear all is lost if Value Line is recommending these two dogs, because neither of those issues has any redeeming value. I suspect that the analyst at Value Line slipped his disk or thinks this is the year 2007.
Frontier Communications (FTR-$5.66) is a $4.8 billion-revenue company that provides steadily declining wireline services to residential and commercial customers in 27 states. Frontier also offers satellite video, data and Internet services such as high-speed Internet and portal and email products. Though FTR’s landline business is disappearing into the ethers and vapors, its broadband business has added about 100,000 new customers in the past 12 months. Management expects this growth to continue, albeit only over the short run. Other wireless providers are expanding their services with a 4G LTE network that is significantly faster than FTR’s DSL. This faster network puts FTR at a competitive disadvantage. However, Maggie Wilderotter, FTR’s chairwoman and CEO, is committed to DSL, and that could be very shortsighted on her part.
FTR’s revenues have been falling in the past few years, and Wall Street expects a decline to $4.6 billion this year. But the good news is that earnings may rise from 23 cents to 25 cents in 2014. And though net profit margins should increase from 4.6 percent to 5 percent, the bad news is that the dividend isn’t covered and may not be covered for some time in the future. In fact, the usually estimable Value Line suggests that the dividend may not fully secure. FTR is not an investment I would care to own in my IRA — or in any other account, for that matter.
Annaly Capital Management (NLY-$10.93) is one of those fangled mortgage real estate investment trusts that delighted investors with 14 to 18 percent yields just a few years back, when the stock was trading in the high $10s. But oh, boy, the buffalo chips really hit the fan in 2009, when earnings went into a free fall and book value began to tumble. And in the process, NLY’s dividend declined every quarter, from 66 cents a quarter to 35 cents last year. Unfortunately, tens of thousands of investors seeking high yields continued to hold the stock, watching it fall from $20 all the way to $10.
NLY owns and manages about $90 billion in mortgage pass-through certificates, collateralized mortgage obligations and myriad other debt securities backed by pools of mortgage loans. This year, the Street believes that NLY’s revenues and earnings will be flat, and the quarterly dividend was recently lowered to 30 cents a quarter. However, Market Edge and Bank of America believe that NLY has bottomed and that revenues and the dividend can rebound nicely late this year. I might consider owning this as an income speculation, but not in a retirement account. Stay away from that neighbor (I’m sure he means well), and future columns may discuss some high-income issues, so keep reading.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.
© 2014 Creators Syndicate Inc.


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