During the holiday shortened trading week, Frontier Communications (FTR) issued a series of press releases about its debt. On Wednesday, it issued the following two releases. First, the headline "Frontier Communications Announces Offering of $500 Million of Senior Notes" appeared. The release read, in part,
Frontier ... has commenced a registered offering of $500 million aggregate principal amount of Senior Notes due 2024 (the "Notes").
Frontier expects to use the net proceeds from the offering of the Notes, together with available cash, to finance its cash tender offers, announced today, to purchase up to $674.8 million in aggregate principal amount of its outstanding 7.875% Senior Notes due 2015 and 6.625% Senior Notes due 2015. If the tender offers are terminated for any reason, or if any net proceeds otherwise remain following the tender offers, Frontier intends to use such net proceeds for the selective repurchase, repayment or redemption of its outstanding debt or otherwise for general corporate purposes.
The companion press release titled "Frontier Communications Commences Cash Tender Offers for Any and All of its 6.625% Senior Notes due 2015 and 7.875% Senior Notes due 2015" detailed some additional information about the premiums to be offered on these two debt issues. For each $1,000 6.625% Note ($300 million principal amount), the company will pay $1,127.37, and for each 7.875% Note ($374.803 million), the company will pay $1,141.91.
Then, on Thursday, the company announced that it had increased the size of the offering to $750 million. The coupon rate on the new debt will be 7.625%, somewhat higher than the previous debt raised last year when the coupon was 7.125% with part of the offer at par and part of the offer at a premium of 104.25, reducing the yield to 6.55%.
The increased size of the offering was used to increase the bond tender from $674.8 million to $899.8 million and include the 8.25% Notes due 2017. And, in the midst of this, on Thursday, Fitch rated the offering BB+ (Moody's rated the bonds BA2). Fitch also reiterated its previously disclosed outlook as negative.
The shares of the stock on Thursday opened at $3.90, and plunged sharply in mid-afternoon to a low of $3.71 before suddenly turning around and closing at $3.99, just off the $4.00 per share high for the day - up $0.17 or 4.5% on the day. Normally, I don't follow stock movements quite so closely throughout the day, but I had experimented earlier this month by opening a buy stock-sell call position on Frontier to capture the dividend. And since the dividend had already been earned (the ex-dividend date was the March 6th), I have been looking to unwind the position on this short-term trade.
So, what occurred to turn the shares around and result in a gain of nearly 8% from the low? At 1:36 PM Nomura analyst Mike McCormack was quoted as follows:
We view these actions as demonstrating the company's ability to fund its dividend and handle debt maturities with free cash flow in the next several years. We estimate that Frontier will generate $3.5bn of free cash flow in 2014-2017. This exceeds the dividend obligation and debt maturity total of $3.15bn, allowing the company to de-lever, invest in the business, and grow its cash balance over that timeframe. We estimate Frontier will maintain approximately a 50% dividend payout ratio for the next five years, equating to a 60% payout on a fully taxed basis.
The brief article also noted:
...the debt transaction further supports the one thing that matters most to investors - the dividend.
McCormack continues to prefer Frontier Communications over peers Windstream (WIN) and CenturyLink (CTL) on valuation and superior dividend coverage. He maintained a Buy rating and price target of $5.50.
For me, the reason to invest in Frontier is the dividend, which has been cut twice in the past few years. The current yield is an attractive 10%, well above those of most other telecom companies, including AT&T (T) at 4.9%, Verizon (VZ) at 4.2%, and CenturyLink at 6.2%, and below Windstream at 12.5%. It should be pointed out that AT&T and Verizon have consistently raised dividends for a very long time, while CenturyLink has recently cut its and Windstream has not increased its dividend since the end of 2006.
I have been invested in Frontier (and also traded the stock) for the past several years. I am long because of the fat dividend yield, and recently increased my position because I believe that the dividend is safe for at least the next year. The announcements this past week about the reduction of the debt and extension of the maturities had reinforced that belief, however, I was beginning to wonder what I was missing as the stock was dropping towards that $3.71 low for the day.
Like many investors, I tend to look favorably at analysts that agree with my position, so it was certainly reassuring to see an analyst at a major firm re-affirm his buy rating and the lofty $5.50 price target. In fairness, though, it should be pointed out that McCormack has a much more positive view than the one issued by Goldman Sachs late last year. It rated the stock a sell with a $3.75 price target, although Goldman also saw little near-term risk to the dividend.
Additional disclosure: I have covered calls written against FTR and WIN and may buy or sell most of the stocks mentioned in this article at any time.