Frontier Communications (NYSE:FTR) was one of the highest-yielding stocks in the market. However, two dividend cuts over the last three years have not gone down well with the investors. Despite the dividend cuts, the stock yields over 8% and the quarterly dividend has been unchanged for the last nine quarters, indicating that the cash flows have stabilized. Apart from the attractive dividend, the stock gained 21% over the last twelve months. In this article, I will be focusing on the cash, dividends, payout ratio, and the future growth opportunities in order to gauge the stability of the dividends.
Dividend and Cash Flows
Most of the companies paying high dividend yield face the question about the stability of the dividends. Currently, Frontier distributes $0.10 in quarterly dividends to its investors, yielding more than 8%. The company reported year-end revenue of $4.76 billion compared to the $5 billion in the previous year. The falling revenue has become a trend in the sector, and it was nothing new for the company. However, the company has shown an improvement at the end of the year, mainly due to the increase in data services revenue. Frontier managed to improve its customer retention ratio by 61% in the last year, which will result in the improvement of revenue in the coming year.
Apart from the customer retention ratio, the free cash flow of the company is also supporting the investors' confidence in Frontier. The company showed an increase in the free cash flows during the last year - free cash flows have risen by 14% to $861 million, compared to $750 million in the previous year. Frontier is also making efforts to increase its future free cash flows through different measures. The company decreased its debt by about $1 billion during the last year. The decrease in debt will bring down the interest expense, which will enhance future cash flows. Furthermore, a decrease in leverage will certainly please the shareholders.
The telecom sector requires a heavy capital expenditure allocation, which enables the companies to safeguard or enhance the market share. Capital expenditures play an important role in the telecom sector. Frontier has also allocated hefty resources to enhance its position in the sector; however, over the last year, capital expenditures have actually come down by about 20%. As a result, growth in the free cash flows has been observed over the period. The company has also met its capital expenditure guidance for the last year and kept it below $700 million.
Moving onto the sustainability of the dividends - there are several methods to test the stability of dividends; however, my preferred method is payout ratio based on free cash flows. The company is paying 46% of its free cash flows in dividends. This is quite a decent figure to judge growth in future dividends. I believe a company should have around 40% in buffer in order to continue growth in its dividends. Despite the decrease in its revenue, the company has been able to generate impressive cash flows. The company has also managed to decrease its gearing by 6.5% over the last year - which will decrease the finance costs and further increase the free cash flows. This has put Frontier on the safer side as far as dividend growth and stability is concerned. Furthermore, the capital expenditures and growth prospects have also positioned the company well to grow its cash flows.
The biggest challenge for Frontier is that the customers are now moving towards latest broadband and wireless connections, leaving behind the conventional landline services. Due to this, Frontier has faced severe churn in its customer base. However, the company has finalized the acquisition of the wireless business of AT&T (NYSE:T) in Connecticut, which will bring in more revenue and stabilize the customer base of the company. Frontier benefited from its previous deal with Verizon (NYSE:VZ). The core growth component of Frontier is its broadband services. One of the most positive factors is that it has been able to add more than 112,250 new broadband customers, which exceeded the total net additions for the past 3 years combined - if the growth in broadband customers continues; the cash flows and revenues will be enhanced substantially, as it is one of the most lucrative segments of the sector.
Furthermore, the company has strengthened its data portfolio by focusing on optical transport services; which will provide fast data transferring speeds to its business, enterprise, as well as individual customers requiring extensive data bandwidth with secure transportation. By entering into the optical transportation networking segment, Frontier is directly competing with leading market players; Cisco (NASDAQ:CSCO) and Ericsson (NASDAQ:ERIC). Meanwhile, the company is also improving its core business of copper landline networking. This update includes application-based routing and Quality on Service (QoS) capabilities, which will improve the error rates and bandwidth problems, ensuring customer satisfaction. These value additions will reinforce the customer base of Frontier Communications and ensure future growth of the company.
The purpose of this article was to assess the dividend stability as well as the prospect of future growth in the dividends. The company has good growth prospects and stable earnings outlook in the coming year, with increased customer retention ratio, ensuring stable dividends and increased revenues in the future. However, the declining trend in revenues in this sector is a concern. In my opinion, the dividend cuts in the past have allowed the company to bring its dividends to a sustainable level. At the moment, the company is focusing on lucrative segments of the telecom sector, and the future cash flows will grow, in my opinion. As a result, I believe Frontier is a safe addition to the dividend portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.