Less than one year ago, Frontier Communications (FTR) executives had yet to announce that they would be cutting the dividend from $0.75 to $0.40. In fact, the Board of Directors and key executives, including Chairman, CEO and President Maggie Wilderotter, CFO Don Shassian and Senior VP & Treasurer David Whitehouse, had consistently misled investors about the safety of the dividend through a series of investor conferences and press releases. Until listening to the Frontier presentation at the Citi Global Internet, Media & Telecommunications Conference, I had not realized the extent of the management changes since the dividend cut.
The presenter at the conference was Senior Vice President and Treasurer Robert W. Starr who had joined Frontier last September, replacing Whitehouse. And Whitehouse wasn't the only change. Wilderotter relinquished her title of president to Daniel McCarthy last April and Shassian announced his resignation on December 19th, although he will not relinquish his title until the 2012 books are closed and certified on February 26th (and he is scheduled to remain through the end of March to assist in the transition). His replacement will be John M. Jureller, who is described as someone with "...demonstrated expertise with turnaround companies, merger integration planning and execution, risk management, financial planning and analysis..."
Whether these organizational changes are the result of the dividend debacle, or merely due to fatigue resulting from the ongoing challenges of integrating the acquisition of a large portion of Verizon Communication's (VZ) assets over the past two and a half years, or merely a coincidence is not known. What is known is that responsibility for managing the business and handling the finances will be in different hands as the company enters a new year. On the financial side, the company had three debt offerings since the dividend cut and has completed its systems conversion - all positives for the company.
At the conference, Starr discussed debt, noting that Frontier had taken on $1.35 billion in new debt in the past year, would be paying more than $0.5 billion with cash on hand this week and expected to pay off all debt coming due through 2016 and a "good chunk through 2017" with cash on hand and residual free cash flow.
Some other highlights of his presentation noted:
- Broadband speeds of 20 meg are available to 42% of the company's footprint, and are expected to be expanded to 52% this year.
- Speeds of 1 gig are available to 71% of the commercial customers.
- Frontier is targeting $100 million of cost savings from wage and non-wage sources in 2013 and an additional $100 million in 2014.
- Cap-Ex is expected to decline to $625-$675 million in 2013.
- The extension of the 50% bonus depreciation provides no benefit to cash taxes for 2013, although there will be a benefit in 2014.
- Objective remains to get leverage down to 2.5x in 2014.
- Focus is on revenue development with marketing program responsibility driven by managers in local markets.
- Customers kept or obtained through promotions exhibit a lower churn rate than other customers.
- Commercial sales force is now at 75% of targeted level (of about 100).
- Cable is a competitor in 93% of its markets.
- Tiered broadband pricing is inevitable.
Starr also noted that the cap-ex was focused on broadband and enhancing speed, improving reliability and expanding reach. He also stated that the network had "good reliability." His definition of reliability appears to be at odds with that of the FCC that issued a report on weather related outages last Summer.
The Bureau found that above and beyond any physical destruction by the derecho, 9-1-1 communications were disrupted in large part because of avoidable planning and system failures, including the lack of functional backup power, notably in central offices. Monitoring systems also failed, depriving communications providers of visibility into critical network functions. In most cases, the 9-1-1 and other problems could and would have been avoided if providers had followed industry best practices and available guidance.
While important aspects of 9-1-1 service are under state and local jurisdiction, the Commission has a statutory obligation to ensure that our nation's communications networks "promot[e] safety of life and property," and action at the federal level could help prevent similar failures in the future.
The report stated that West Virginia and Ohio, two states serviced by Frontier, were among the four states "experiencing the largest impact on communications." Frontier responded to the report with a press release of its own, which reads:
Following the event, Frontier engaged with the FCC to discuss lessons learned and provide details regarding our emergency preparation and network resiliency processes and procedures. Based on those conversations and our own internal assessments, we further invested in our network to improve our disaster preparedness.
That effort almost immediately delivered benefits to our customers, as shown by our success in restoring service in the aftermath of October's catastrophic Superstorm Sandy. Frontier will carefully study the FCC's Derecho Report as we continue to improve our processes and preparedness to ensure reliability for all of our customers."
It remains to be seen whether future "conversations" will require additional capital expenditures beyond those already anticipated.
For me, the reason to invest in Frontier is the dividend. The current yield is an attractive 9.1%, well above those of other telecom companies, including AT&T (T) at 5.3%, Verizon at 4.9%, and CenturyLink (CTL) at 7.3%, and below Windstream (WIN) at 10.3%. It should be pointed out that AT&T and Verizon have consistently raised dividends for a very long time, while CenturyLink has had the same dividend for the past three years and Windstream has not increased its dividend since the end of 2006.
Two months ago Frontier was downgraded to sell by Goldman Sachs with a price target of $3.75. The analyst wrote:
Though we see little near-term risk to the dividend, EBITDA declines limit the ability to delever the balance sheet. We forecast FCF/share declines of 15-17% in 2013/2014.
Although another dividend cut is unlikely in the near term, there is little reason to expect an increase within the next two years as the company focuses on reducing leverage to 2.5x.
Any investor in Frontier should take a half hour to listen to Starr. They should also be aware that the 2.5x leverage target has been talked about ever since the acquisition of the Verizon properties. It is a target that has so far proven to be elusive. Whether or not the changes to management were sufficient to help the company reach the target remains to be seen.
And, as an investor, I would prefer the board complete cleaning house and remove Wilderotter from her remaining posts of Chairman and CEO.
Additional disclosure: I have covered calls written against FTR and VZ and may buy or sell most of the stocks mentioned in this article at any time.