For anyone out there chasing dividend yields, Frontier Communications Corp. (NYSE: FTR) could be the stock for you. Its dividend yield has now climbed past 11%, as questions loom over its fundamentals. Frontier's most recent earnings release showed additional disappointments, sending the stock spiraling lower.
Frontier has now lost 8.3% since its earnings announcement while the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) has declined just 4.3% since the market close on August 2, 2011. Furthermore, since July 1, Frontier has shed 17.6% against the SPY's decline of just 10.3%. While one might expect high growth technology companies to gyrate around more wildly than the market, it is a disconcerting attribute for what should be a plain communications service company.
Frontier shows high volatility, despite a low beta
According to Yahoo!Finance, Frontier has a beta of about .8 which is a reflection of its relative volatility to the market and overall return correlation to the market. However, this is not the entire story. Beta is the product of:
Relative Volatility (ratio of Frontier's volatility to SPY's volatility)
A casual investor might look at Frontier and see the beta below 1 and think that this is not a very volatile or risky stock. However, the following table shows that this is not true:
FTR Beta Calculations
|Metric||Formula||36 Months||48 Months||60 Months|
|Relative volatility||D = A/B||141.3%||138.7%||137.8%|
|Implied Beta||= D x C||0.88||0.83||0.83|
Source: Yahoo Finance for split and dividend adjusted monthly prices, author calculations. It is unclear what time frame Yahoo Finance calculates its beta over, hence the differences in the implied betas from the Yahoo Finance posted beta of .78.
The above table shows clearly that Frontier is not less volatile than the market, as proxied by SPY. The low beta is a result of having a relatively low correlation to the market.
Frontier is more correlated in down markets than up markets
However, that is not the only problem. Checking further into the situation, I looked at the correlation across months when SPY was down. Frontier posted a 61.5% correlation over a 60 month sample, which is not a bad result. However, when looking at up months for SPY, Frontier offered just a 16.5% correlation. This is a fascinating result and basically says that when SPY goes down, there is a pretty good chance that Frontier will go down. When SPY goes up, Frontier might go up or it might go down.
Taking a larger sample showed that Frontier is correlated at 43% when SPY goes down and just 16% when SPY goes up. While it is good for diversification benefits that Frontier has a low correlation to SPY, it is not so good that it is asymmetric. Looking at it another way, over the history of SPY, Frontier has had 23% more down months. Since 2003, on a dividend adjusted return basis, Frontier has just a -31% return to SPY's 40% return.
Dividend Adjusted Returns
|Since Jan 2003||40%||-31%|
|Last 36 months||-1%||-24%|
|Last 24 months||21%||18%|
|Last 12 months||3%||-18%|
Source: Yahoo Finance for data. Author calculations.
Frontier shows performance that consistently trails the market despite its high dividend. While historical return performance is no indication of future performance, this analysis suggests that there are some significant fundamental challenges for Frontier. Furthermore, businesses can and do change over time and Frontier has certainly done that through its acquisition of certain Verizon Communications (NYSE: VZ) assets.
However, its recent poor stock performance and disappointing results should give investors pause to reassess whether or not this is one the best investment opportunities available. A sky high yield is not much use if it accompanies significant capital losses. Its 8.5% short interest shows that I am not Frontier's only skeptic.
Disclosure: I am long SPY.
Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.