On January 25, Frontier Communications (FTR) dropped to a new 52-week low. And it's not just a 52-week low; it hasn't been this low in a decade. Has anything changed since December 5, when Frontier management delivered the second of two early December presentations at investor conferences? The shares of Frontier were trading just below $5.80 per share on December 6, right before the ex-dividend date.
This week Frontier is trading at levels almost 20% below the closing prices on December 5 and 6 and the dividend yield is now nearly 16%. Should there be a cause for concern? The combined wisdom of the market is clearly stating the company will deliver disappointing news and/or cut its dividend next month when it releases its fourth quarter and full year results. At that time management will also discuss full year 2012 guidance and sustainability of the dividend, either proactively or in response to analysts' questions.
If an investor is to believe management, the company's dividend coverage is right where it was expected to be when Frontier undertook an ambitious acquisition of portions of Verizon's (VZ) business. Despite the Safe Harbor statement about the future that is included in press releases or management presentations,
This press release contains forward-looking statements that are made pursuant to the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. These statements are made on the basis of management's views and assumptions regarding future events and business performance. Words such as "believe," "anticipate," "expect" and similar expressions are intended to identify forward-looking statements. Forward-looking statements (including oral representations) involve risks and uncertainties that may cause actual results to differ materially from any future results, performance or achievements expressed or implied by such statements. These risks and uncertainties are based on a number of factors, including but not limited to:
Management has an obligation to fully disclose material information to shareholders on a timely basis. Failure to do so can result in penalties under the Sarbanes-Oxley Act. Has management risked withholding material information, or is the act vague enough to allow it?
So, if nothing has changed, are there other issues that might have escaped my notice? Many investors look at insider trades to gauge the future prospects of a company. The theory is that insiders know more about the company than anyone else. If they are buying, better times lie ahead for the company. If they are selling, then there must be some undisclosed problems.
I am a bit skeptical about many insider moves. Legendary mutual fund manager Peter Lynch discussed insider trading in his 1989 book One Up On Wall Street. He wrote that insiders could sell for any number of reasons, but they only buy if they expect the shares to rise. These days there are other reasons that insiders buy. Sometimes corporate directors and officers are expected to own stock in their company. At other times, the chairman or CEO may make a symbolic purchase to demonstrate their belief in the company. This may or may not be a reason that Mary Wilderotter purchased 48,000 shares of Frontier at $5.25 in late November. And while a quarter million dollar purchase is impressive, when your total compensation package is $8.6 million, it is less significant.
While I was scanning back through previous buys, I came across an insider buy that I found more significant. On September 9, Chief Legal Officer and Executive VP Kathleen Abernathy bought 40,000 shares at $6.81, a total investment of more than $270,000. She had previously served as a director for Frontier and became an executive on March 1, 2010. Her compensation was not included in the 2011 proxy, indicating that she was not one of the five most highly compensated officers. I view this purchase as far more significant than Wilderotter's, because it represents a much larger percentage of Abernathy's compensation.
Does that purchase represent a significant data point? Possibly, but not if it was expected of Abernathy as an executive. After examining other insider trading activity for 2011 it was difficult to find any discernible pattern. Some of the selling might have been tied to restricted stock grants since there were buys where the purchase price was $0. If that is the case, these sales might have been made to cover the tax liability.
With insider activity somewhat positive (although not definitely meaningful) and no new information coming from the company, what should an investor do? The market has been pricing in bad news and a dividend cut. Management has given no indication that bad news or a dividend cut is imminent.
Management has told investors that the dividend coverage is where they expected it to be. Investors should expect and value management honesty. It's one of the reasons we entrust our money to their care. Until they violate that trust, I will remain an investor in Frontier and continue to expect that $0.1875 quarterly dividend.
Disclosure: I am long FTR, VZ. I occasionally day trade FTR. and I may add to my positions in Frontier and/or initiate a covered call strategy at any time.