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Frontier Communications (NASDAQ:FTR) is a provider of telecom services for small communities and rural areas, currently operating in 27 states. The company chiefly caters to domestic business customers. Frontier services include local and long distance telephone service, satellite video, digital television, wireless Internet data access, entertainment services, and broadband Internet.

Frontier Communications has been performing well, and since my last article, has gained about 20 percent. Throughout the last year, the telecom industry has also been generally performing well, having returned over six percent during the last year, in line with the broad market index.

This article examines Frontier Communications dividends, cash flows, and debt. Though this company has for years boasted of large dividends, recently the dividend has been in decline. Even so, Frontier has a strong dividend yield of 9.10 percent, and the company pays an annual dividend of 40 cents per share.

Revenues

Revenue for the second quarter of 2012 was $1.26 billion, with a five percent decrease after the first quarter. The primary cause of this decrease was the reduction in the number of business and residential customers; a significant number of these customers left as a result of the present economic conditions, competition, and the loss of second lines after the addition of broadband service. In total, the number of lost access lines during the second quarter amounted to 92,700, a slightly better number than the 102,100 lines lost during the first quarter.

Total lost access lines for the six month period was eight percent, while the number for the same period last year stood at nine percent. It is important to mention that not all of these access lines represent a loss of customers; Frontier also removes lines when it upgrades its customers from dial-up to broadband.

With this in mind, the total number of customers is generally a more accurate indication of the state of the company. Residential customers declined by eight percent while business customers for Frontier declined by nine percent. Frontier is incredibly active in the broadband market and continues to add customers in this category. In fact, during the second quarter, Frontier managed to add 5,400 new broadband subscribers.

Cash Flows

Frontier has an extremely strong operating cash flow margin of 49 percent and free cash flows of $285 million for the second quarter of 2012. Frontier is working on improving its cost structure. The company has been cutting jobs, and other inefficiencies to reduce costs. With such cost saving strategies, Frontier was able to save $9 million during the second quarter. The recent dividend decrease of 47 percent has also made higher cash flows possible; in total, this dividend cut will add $348 million to Frontier's cash flow, to permit the company to appropriately meet its cash needs.

Frontier Communications has experienced an upward sloping trend in its operating cash flows. Operating cash flow for the past year was $1.57 billion, representing a significant increase from 2008 levels of $700 million. Operating cash flow is expected to further improve, with at least $100 million added due to cost savings and synergies. Moreover, Frontier's low total cash flows can be directly attributed to the company's heavy investment in new equipment, which will ultimately benefit the company in the long term.

Debt

Frontier Communications has a debt-to-equity ratio of 1.8 at the moment. Recently, Frontier's debt has been on the rise. In May, Frontier issued $500 million in senior unsecured notes. With the proceeds from this issue, Frontier plans to tender two previous issues, both of which mature over the next two years.

One of the issues was dispensed at a discount at the time of its origination, costing Frontier a net interest expenditure of over ten percent. A new $500 million issue will cost Frontier 9.25 percent, so a future decreased interest expenditure can be expected. Thus, though recent dividend decreases may have been somewhat painful for investors, they were an essential step to preserve the long-term well-being of the business. In fact, this dividend cut will increase annual cash flows by $348 million, while savings resulting from this move and the new $500 million debt issue are expected to pay off debts of over $1 billion.

Ratios and Liquidity

Ratio

Frontier

Industry

Debt to Equity

1.8

2.4

Operating Margin

17.4

12.8

Price to Book

1.0

1.7

Price to Sales

0.9

1.2

Frontier has an exceptionally strong liquidity position, with both a $750 million revolving credit facility and ample free available cash flows. The planned dividend reduction will significantly increase the free cash flow over the course of this year. I expect the current year free cash flow to fall between $360 million to $400 million. In addition, improving the company cost structure will further strengthen the operating margin. Frontier can also be expected to further improve these ratios in the future and demonstrate even better results in the second half of the year.

Summary

After the two years of acquisition, I believe the firm is now through the evolution period, with a growth period certain to start soon. Management will now be able to focus on growing the business, as recent reports show the lowest loss levels since acquisition of Verizon's (NYSE:VZ) landline assets. The recent dividend cut was most likely the company's last, and I expect the current dividend level to continue. Frontier will thus be able to generate enough free cash flows to meet these dividends. In particular, some rural customers still have only a landline for communication; these customers will likely make decisions that will benefit Frontier Communication.

Frontier's future prospects are excellent and, with management making the right decisions, investors will profit hugely in the future. Frontier is very likely to yield healthy returns in the future along with substantial dividends. After the recent dividend cut, the current dividend is totally safe, and there is no need to worry about future dividend cuts.

Source: How Safe Is Frontier's Dividend?