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Summary

  • Frontier trades at a very expensive P/E ratio while revenue is falling.
  • Frontier’s earnings are expected to decline over the next five years, and this puts its dividend in danger.
  • A huge debt burden and a huge payout ratio negate the many catalysts that Frontier has.

Telecom services provider Frontier Communications (NASDAQ:FTR) is seeing good traction in broadband services. Driven by this segment, Frontier has been able to turn in a steady bottom line performance of late despite revenue declines. But until and unless the company manages to return to revenue growth and delivers substantial earnings growth, there might not be much sense in holding it.

Let's face it; investors buy Frontier for its juicy dividend yield of 7%. However, the company has a checkered dividend history wherein it has cut its dividend two times in the last four years. So the question is, are there enough catalysts to invest in Frontier apart from its dividend? Let's see.

Frontier's growth plans

Frontier's revenue declined 4.2% in the previous quarter, failing to meet analysts' expectations. Frontier needs to fix this going forward if it is to keep its juicy dividend yield in place. The company is indeed making some good moves to return to growth. Its broadband segment is doing well and helped Frontier report a profit in the last quarter. Frontier is tapping more markets to grow its broadband business, and this resulted in a record addition of 112,250 broadband accounts last year. Also, Frontier saw market share gains in 84% of its markets due to the robust broadband services that it provides.

Frontier has also implemented certain initiatives that have reduced customer churn rates. As a result, the company was able to deliver 61% residential customer retention improvement in the fourth quarter. Moving on, Frontier is looking to increase its customer base by penetrating more markets by focusing on small businesses. Frontier's small business bundles are finding good traction in the market and could continue driving its broadband growth.

Moreover, the company's security product, Frontier Secure is also gaining popularity. Frontier Secure has led to a 50% increase in broadband connections for the company, and it is looking to sustain this trend going forward. Further, Frontier has launched Frontier Secure with new broadband bundles, and once again, it is seeing solid user acceptance for the product.

This year, Frontier is planning to focus more on cost reduction initiatives. It already achieved a reduction of $26 million in expenses in the last quarter and the trend looks set to continue this year. Frontier is focusing on reduction in costs from other areas of its business, while the AT&T Connecticut acquisition is supposed to be another growth driver. According to Frontier's CEO -

We will be acquiring an extremely attractive set of assets that AT&T has invested in over the years. The networks have been upgraded and well maintained with 96% broadband coverage and over 40% U-verse coverage. It is a business we know extremely well and it leverages our core competencies in a geography that is contiguous with existing territories and it covers an area where a good number of our headquarter employees already live.

In addition, Frontier is also planning expansion of its distribution partnership with a view to gain more customers. Further, the company is bringing Frontier Secure with alternate channel partners. Frontier is also launching new bundle products, allowing customers to purchase a broadband and Frontier Secure product as a standard double-play bundle. Further, Frontier is expecting a better performance from its CPE portfolio and Ethernet platform. Moreover, Frontier's capabilities in Ethernet, including QoS and SLA monitoring, should enhance its competitive position at larger enterprise customers as well as telecom carriers.

Unfavorable valuation

Frontier trades at a mighty expensive 49 times trailing earnings. For a company that's reporting negative revenue growth and has a negative earnings growth projection of almost 6% for the next five years, Frontier is very expensive. In the past five years as well, Frontier's earnings have dropped at a CAGR of 10%, and if this trend continues going forward, the dividend might be under threat. As it is, Frontier has a sky-high payout ratio of 364% and a debt burden of around $8 billion that will hurt earnings in the form of interest expenses.

Thus, even though the company is making some promising moves, its valuation, high payout ratio, and debt make it a risky proposition. In addition, Frontier has a history of choosing infrastructure growth and maintaining its dividend over reducing debt, which doesn't look like a sound business strategy for the long run.

Conclusion

All in all, it can be concluded that if we remove Frontier's juicy dividend yield from the equation, it doesn't look like a good buy. Also, since the company has a lot of negative points as we just saw, the continuity of the dividend is also not guaranteed. So, investors should stay away from Frontier for the long run.

Source: Frontier Communications Is Nothing Without Its Dividend, Here's Why