On August 3rd, Frontier Communications (FTR) released its second quarter earnings report during a week that featured the debt ceiling debate going down to the wire, renewed concerns about the sovereign debt crisis in Europe, record highs in gold prices, record lows in the two year treasury note, a disappointing ISM report, and finished the week with a tepid jobs report and a downgrade on the US credit rating by S&P. It certainly wasn't the best environment to miss, even slightly, the analysts' estimates on performance. I suppose it should not be too surprising that Citigroup (C) lowered its price target to $7.50 and maintained its rating of "hold" or that Bank of America (BAC) reiterated an underperform rating and maintained a price target of $7. So, are the shares on sale or is investing in Frontier at this time like catching the proverbial falling knife?
For me, it's all about the sustainability of the annual $0.75 dividend. Based on the August 5th closing price of $6.76, the yield was over 11%. I expect the shares will be even cheaper this morning when the market reacts to the S&P downgrade creating an even better buying opportunity.
Frontier Communications is a Fortune 500 company operating in 27 states and, according to its website, is the largest pure rural telecommunications carrier in the United States whose services "include voice, high-speed Internet, satellite video, wireless Internet data access, data security solutions, bundled offerings, specialized bundles for small businesses and home offices, and advanced business communications Access Solutions for medium and large businesses."
It is also just over a year since the company completed its acquisition of a portion of Verizon Communications, Inc.(VZ) businesses and cut the dividend from $1 to its current level. The integration of the acquisition appears to be going better than expected, and during the conference call, the company noted that
We are raising our annual synergy target range to a $475 million to $500 million run rate by the end of this year, and now expect to exit 2012 at a $600 million run rate. That is a $50 million increase from our prior Q3 2010 target and a $100 million increase from our initial forecast.
These cost savings will help to ensure the sustainability of the dividend. But it's not only on the cost side where the company is showing improvement. The Register-Herald editorial noted:
"Frontier has more than lived up to its promise and, based on the most recent information released by the telecommunications company, the expenditures and system improvements that have been made are far ahead of schedule." The editorial ended with "The acquisition has proven to be good for West Virginia to this point and it's a darn sight better than what Verizon was doing before."
These improvements included rolling out access to high speed Internet services for its customers, an increasingly important revenue source for telecommunications companies that face the erosion of land-line customers.
And it is not just in West Virginia where the company has increased access to broadband services. The company has increased broadband access to 142,000 new homes in Q2. Frontier continues to integrate the Verizon assets, simultaneously generating cost savings, Improving service and creating more revenue opportunities. As they continue to deliver on these promises, it makes me feel more secure in the safety and sustainability of the dividend as well as my investment in Frontier.
I recall listening to one the guests on WBBR talking about buying opportunities in the stock market. He noted that Americans love a bargain and are willing to buy anything that goes on sale. Anything, it seems, except stocks. Will you be buying Frontier while it's on sale?