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By Kathleen Martin

When dinosaurs roamed the Earth and I was an equities trader, whenever there was a sell-off of a stock that didn't really deserve the beating it was taking, the head trader used to yell the Kmart tag line "Attention Kmart Shoppers!" Occasionally, I remember that saying when I am looking at a trading opportunity. Frontier Communications (NASDAQ:FTR) is bringing back the memories of the cantankerous head trader and the opportunities he had us minions run for. That guy half in the bag could out-think anyone, he was just not that quick on his feet back when we still needed to use them to trade. I think if he was still in the game he would be yelling some expletive filled marching orders to my successor about Frontier and making a whole lot of people happy on the day.

Frontier is a player in mostly the rural telecom space. It provides voice, broadband, satellite video, wireless data access, data security, bundled offerings to households and businesses in 27 states and has approximately 15,400 employees, all based in the U.S. It serves small to medium urban markets and rural areas and offers satellite TV in partnership with Dish Network (NASDAQ:DISH). The stock trades around $3.40. It has a 52 week range of $8.89 and $3.06. The price earnings ratio is 28.32. It has earnings per share of $0.12. As an added bonus, at the current price, Frontier's dividend yield is 12.4%. The company has total cash of $265 million and total debt of $8.29 billion. Its book value per share is $4.39. The company has a current ratio of 0.77 which means that it will have to do some work reorganizing its debt load to stay on top of current liabilities.

In 2009 Frontier announced that it acquired approximately 4.8 million access lines from Verizon. This transaction created the largest pure rural communications services provider. At the time of the acquisition Frontier had seven million access lines, 8.6 million voice and broadband connections and 16,000 employees in 27 states. The acquisition allowed Frontier to offer new bundled services and enhanced technologies to customers in an broader geographic area. It currently has approximately 3.5 million residential customers and more than 380,000 business consumers.

Frontier's first quarter 2012 results show $26.8 million in net income and $0.03 per share. This figure missed consensus estimates of $0.06 per share. The causes were the costs associated with the Verizon acquisition including severance packages and early retirement costs. The company is confident that the heavy lifting is behind it in terms of integration costs from the Verizon acquisition and feels it can now focus on revenue growth, operational streamlining and broadband penetration.

Revenue for the first quarter was $1,268.1 million compared to $1,283.2 million in the fourth quarter of 2011 and $1,346.7 million in the first quarter of 2011. The decrease is attributed to the diminishing number of residential and business land-line customers, switched access, data services and video. Frontier expanded its broadband customers by 11,700 in the first quarter. It added 4,400 video customers in the quarter. Integration costs were $35.1 million in the first quarter compared to $42.2 million in the fourth quarter of 2011.

The costs were associatned with the successful conversion of nine states into its platform of systems application and ongoing network integration activities. The company expects capital expenditures to be around $725 million to $775 million in 2012 and free cash flow to be in the $900 million to $1 billion. Integration activities will clock in at $40 million.

Frontier completed a 14 state system roll-in to Frontier's legacy systems so that all operating, financial and human resource systems related to the 2010 acquisition of Verizon wire-line exchanges. The conversion has been completed nine months ahead of schedule. The completion of this conversion reduces costs and streamlines operations, provides better customer response times and sets the stage for the quick delivery of new products and services. It is anticipated that this conversion will provide for better customer retention, increased market share and with provide better procedures to get products and services quickly to the customer base.

Frontier Communications has cut its dividend steadily since 2004. The last go around was half a year ago from $0.18 to $0.10. Frontier needs to make increasing capital investments in broadband, particularly for video transmission. Some analysts have pegged a $4.50 price mark for Frontier. The company is experiencing weak subscriber growth and declining revenues. It is lowering its rate of revenue decline with the reduction of access line losses, high speed, broadband expansion and new product offerings.

It is making substantial dividend cuts and reorganizing its long term debt to keep a lid on revenue declines. The company faces many competitive threats, and has not been completely successful in integrating the assets purchased in the Verizon acquisition. These factors are going to have a limiting factor on earnings in 2012. Frontier's biggest competitor in the diversified services industry is AT&T (NYSE:T).

In the rural services provider industry, Windstream (NASDAQ:WIN) is its closest and better performing competitor as it has branched into cloud computing and business services which has given it a broader geographic footprint. Verizon Communications (NYSE:VZ) remains a competitor in wireless, broadband and satellite television delivery. Telephone Data Systems (NYSE:TDS) provides wireless, local and long distance, broadband through U.S. Cellular for wireless and TDS Telecom for wire-line. It operates in 36 states, serving seven million customers, and employs 12,300 people.

Some good news on the horizon is the prospect for better revenue as the rate of subscriber loss has been curtailed, the cost savings from system conversions and better than expected margins. Negatives are weak business revenue and that revenue performance is coming from non-core related business activity of less bad debt expense and high margin regulatory revenue which will only decrease in the future as those subsidies paid to operators are diminishing as land line service fades into the future.

There is some news that insiders are picking up the stock at these prices. I would guess that they are bargain-hunting just like everyone else who is looking at this stock. The percentage of the float that is short is 20.50% as of April 30, 2012. There will probably be more at the end of May as the ex-dividend date is June 6, 2012 as investors and funds make a yield grab.The company's common share float is approximately 53.7% in the hand of retail investors and 46.30% in the hands of institutions.

It may be that all or part of its business units will be acquired by a competitor with less debt. It may be that it truly is the bottom. It is trading below its book value. It has some high quality assets. It seems oversold and undervalued as a telecom player. It is a good, liquid, capital appreciation, high-dividend-yield play right now.

Source: Frontier Communications: Why This High-Dividend Stock Is A Buy