By Siraj Sarwar
Frontier's (NASDAQ:FTR) decision to cut dividends has been a painful one for its shareholders. In my view, it was the right decision for the long-term health of the business. The company is seeking to decrease debt by cutting dividends. This move will also enable Frontier to reduce financial leverage, which can further enhance its financial flexibility. Low financing costs can also help Frontier to invest in projects to improve its business prospects.
In this article, I will try to sketch some findings on the company's strategy. For the purpose, I will dig into its financials and other related metrics. I also will look at Frontier's peers to see where the company stands in the industry.
With a yield of 8.75%, Frontier offers one of the greatest dividends in its sector. Frontier has a long history of dividend payments. Dividends are a particularly influential factor for Frontier's stock. Recently, Frontier announced a dividend of $0.10/share. However, Frontier reduced its dividends from $0.19/share in the previous quarter.
I believe the dividend cut is beneficial for the long-term health of the company. The company is looking to expand its size. It was extremely difficult for the company to maintain similar dividends, while at the same time it was making aggressive acquisitions. Moreover, the company took on a massive amount of debt for acquisitions. At present, Frontier is looking to improve its leverage and cash levels. Let's take a deeper look at the company's financials to investigate future dividends and financial health.
In the last 12 months, Frontier generated $5 billion in revenue. In the ttm, the company's gross profit margin fell by $1 billion. Both revenue and margins dropped compared with the previous year. However, the company was still able to increase its income by $4 million in the last 12 months. A cut in operating expenses led the company to achieve the earnings.
Due to the massive debt load, the company paid interest expenses of $674 million last year. Since 2010, the company's interest expenses have risen significantly to $674 million from $378 million. At the end of Q3, the company reported lower integrated costs compared with the previous quarters. It seems that the company is coming out of the restructuring and acquisitions process.
On the other hand, Frontier has stable cash flows at present. In the ttm, the company's cash flows from operations stands at $1.4 billion. Moreover, the company has a large free cash flow of $725 million. For the full year, the company expects free cash flow in the range of $900 million. I believe free cash flows of $900 million can provide the company sufficient flexibility. However, at the end of 2011, the company had $826 million in free cash flows.
In the ttm, the company's capital expenditure stands at $736 million. The company's capital expenditure fell compared with the previous year. This clearly demonstrates the company has reached their expansion goals. Furthermore, Frontier is firm on its decision of reducing debt obligations. Recently, the company reduced its dividends in order to decrease the debt loads. Last week, the company repaid $502 million in 6.25% senior notes. The company has long-term debt of $8.2 billion, a figure that increased from $4.7 billion in 2010, due to aggressive acquisitions.
five year EPS growth
FTR's main industry peers are Verizon (NYSE:VZ) and AT&T (NYSE:T). Frontier looks cheap based on its P/E ratio. It is also the least expensive one based on P/S ratio. Moreover, Frontier offers the best yield in the industry. By and large, all the companies mentioned above are trading at attractive multiples.
I admire Frontier's dividend cut decision. It is a significant decision when the company is expanding, and acquisitions are likely to pay off. The company spent heavily in expansion opportunities in the last two years. I believe Frontier should use its cash flow to reduce debts instead of paying dividends for long-term growth.
Apart from operational improvements, the company returned a considerable amount to investors. Last year, the company's stock gained about 10%. In addition, the company returned $486 million in dividends. Frontier is a long-term play for income seekers. I believe the company has significant potential to increase dividends in the coming quarters.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Siraj Sarwar, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.