Frontier Communications (FTR) has been struggling to integrate the assets acquired from Verizon Communications (VZ) more than two years ago. The wireline customer losses have continually exceeded Frontier's legacy residential losses, and new business from high-speed Internet (HSI) access lines has been insufficient to replace the lost revenue. These losses led Frontier to slash its dividend from $0.75 to $0.40 after Standard & Poor's issued an "outlook negative" credit rating warning in late January.
Frontier's dividend is still one of its more attractive features for investors. It is a bit more than 8% based on the recent share price of just under $5. It is also currently one percentage point below the yield of Windstream (WIN) at 9.2%, but above CenturyLink (CTL) (6.9%) and the giant telcos, Verizon (4.6%) and AT&T (T) (4.7%).
Last week, Frontier announced that it had added on to its previously issued debt, bringing the total to $850 million from the $500 million figure first announced in early August. This is the third add-on/increase to the debt issue. The initial $500 million offering was quickly upsized to $600 million and issued on Aug. 15. On Monday, there was an add-on to the issue of $200 million, which was quickly upsized to $250 million. The initial press release stated:
Frontier will use the net proceeds from the sale of the notes to repurchase or retire its existing indebtedness or for general corporate purposes.
Frontier has approximately $650 million in debt coming due in the remainder of 2012 and 2013. These notes, due 2023, carry a coupon rate of 7.125%. This is significantly better than the terms carried by the prior debt issued earlier this year. In May, Frontier issued $500 million of senior notes due 2021 and was required to pay 9.25%.
It would appear that the debt markets are looking more favorably at Frontier. As the company approaches the end of the third quarter, investors should be focused on whether or not revenue appears to be stabilizing, with a particular focus on whether or not the HSI sales are increasing and whether the POTS line losses are decreasing.
The real test, however, won't come until the fourth quarter when the company needs to demonstrate that the conversion of the acquired properties to Frontier's legacy financial systems provides the improved results that management has been projecting. In the meantime, investors looking for signs of stability of the dividend should view the improved interest rates and oversubscription of the recent debt issue as positive signs.