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This article from NYTimes.com
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This Stock Pays 21% in Dividends, but Few Are Interested
THE 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.
http://www.nytimes.com/2001/08/10/business/10NORR.html?ex=998690212&ei=1&en=40c54e85287ac2b3
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