Cellcom Israel (CEL): Dialing for dividends

"Cellcom Israel (NYSE: CEL) is the dominant cell phone provider in a country where more people use cell phones than almost anywhere else on earth," notes Carla Pasternak.

The editor of High Yield Investing explains, "In fact, there are more cellular phones than people." Here's her look at her latest "High Yield Stock of the Month," which offers a double-digit dividend yield.

"Israelis use them at home instead of traditional fixed line phones. Every 12-year old kid has a cell phone glued to their ear. But the market still has room to grow. The nation's population is growing at almost 2% a year, thanks to a continuous influx of new immigrants. 

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"The economy has grown over 5% a year for the past four years, and a healthy economy means more people with more money to spend on wireless services. And spend they do -- telecom services accounts for over 4% of the nation's economy.

"Only three major operators are competing in this hot market. Each claims a large percentage of the country's wireless market, but the one with the biggest piece of the pie is Cellcom Israel. With over three million customers, it controls over 34% of the wireless market. 

"Since new management took the reins in late 2005, the company has upgraded its network and launched a variety of cutting edge products and services.

"Cellcom's ultra-fast 3G wireless network allows customers to use their phones for more than just voice communication. Subscribers can now text message, download music, or video conference. Revenue from these new data applications climbed over 45% last year

"The company's dividend policy is to distribute at least 75% of annual net income to shareholders in quarterly installments. Besides the regular dividend, management also seeks to distribute at least 50% of earnings each year.

"Over the past year, the company paid out $3.93 per share, including regular quarterly dividends of $2.43 and a special payout of $1.50. That gives the stock a yield of 11.8% of the recent share price.

"According to Israeli tax law, the company must deduct at ource 20% of the dividend amount payable to U.S. shareholders.

"However, U.S. investors can claim a foreign tax credit for this amount against their federal income tax. The dividend should qualify for the 15% reduced dividend tax rate, making the stock suitable for a taxable account. There's no dividend reinvestment plan.

"Israel is hardly a safe haven geopolitically, but it does offer shelter from the financial tsunami on Wall Street. Moreover, company operations have remained unaffected by tensions in the Middle East.

"Earnings are forecast to grow over +20% this year and average 9-10% growth over the next few years, largely due to the company's data-service business. Voice services, which contribute the lion's share of revenue, have been growing at a steady 2-3% clip and are projected to continue doing so in the years ahead.

"Cellcom's shares have enjoyed total returns of more than 40% over the past year in a down market, but are still attractively priced.

"They are selling at just 11 times next year's projected earnings, which is a bargain considering the double-digit dividend yield. Given the growing competition in the country's wireless market, however, CEL is suitable for a moderate-risk investor."