Why You Should Sell Frontier

| About: Frontier Communications (FTR)

I was first drawn to Seeking Alpha several years ago through a headline link on Yahoo Finance while checking out the latest news on Sirius XM (NASDAQ:SIRI). I quickly discovered that I could learn far more from the comments section than the actual articles. The comments by members would support or challenge the analysis, logic and conclusions of the author and each other.

It is not a perfect forum, and not all of the comments stick to the topic of the article. Sometimes, veering off topic is useful to help readers better understand other aspects of their investment. At other times, the comments become attacks and question the intelligence or lineage of their target... but that's veering off topic.

Although I have now contributed 174 articles, my favorite part still remains the comments. And, these comments continue to challenge, surprise, and sometimes will even entertain me. Occasionally, they will also provide fodder for another article. Such was the case from a recent article that examined some key events that took place in Frontier Communications' (NYSE:FTR) recently completed third quarter.

For those unfamiliar with Frontier's recent history, the company "acquired" a large portion of Verizon Communications' (NYSE:VZ) small market business. The acquisition took place two years ago through a Reverse Morris Trust ("RMT") transaction. Without going into too many details of the RMT, it was a tax efficient transaction where shareholders of Verizon wound up owning a majority of the shares of Frontier.

At the time of the announcement, Frontier had a dividend of $1 per share and the yield was in the low teens. Most investors were holding for the dividend yield. Post-merger, the dividend was cut to $0.75, and the yield declined, but again, this was a stock where investors were still chasing dividend yield.

So, even though Frontier acquired a piece of Verizon's business, and even though the assets acquired more than doubled the size of Frontier, and even though both Verizon and Frontier are telephone companies serving both residential and business customers, they are very different investments. And this brings me to the comments and who should sell Frontier.

Comment number one:

As soon as I can get half my investment back, I am selling the lot...and never looking back.

There has been much written about investor psychology. Retail investors often sell too soon when stocks are rising and hold on too long when stocks are falling. We like to be able to talk about our winners, but paper profits aren't really winners. They don't show up on our IRS Schedule D. We haven't really won anything until we have sold and can claim how much money we made.

An even bigger mistake is holding onto losers for the wrong reasons. We hate to admit, even to ourselves, that we made a mistake. And, of course, we feel we haven't really made a mistake if we still have the stock and there is the chance that it will go back up to the price where we bought. Or in the case of the of this particular commenter, as soon as he can "get half my investment back." It is common for us to think we can get our money back if only we hold long enough.

I have no idea where the price was when these shares were acquired, or how likely the share price appreciation, combined with dividends, is to hit that target in the near future. It's just not the best way to invest. Hold it because you think Frontier finally has its act together and the shares will appreciate in price faster than alternative investments. Or hold it because you think it is currently trading below fair value and you think there is a good chance for it to reach that fair value price target. Or continue to hold Frontier because you think its 8.4% dividend is more sustainable than that of Windstream Corporation (NASDAQ:WIN), another telecom stock and one that has a 10% dividend yield.

Just don't hold it because you want to get back to a point where you have only lost half your money.

Comment number two:

I received these stocks as gift from Verizon. Otherwise, I would not have cause to own them.

Verizon has a lot of shareholders. They all received the same "gift." Part of their cost basis of their Verizon shares was allocated to the shares of their Frontier gift. This is not a gift. It is a stock and represents real money.

But, even if you choose to think of it as a gift, what should you do with it? If you get a piece of clothing as a gift, and it's the wrong size, would you keep it? Think of the Frontier shares the same way you think of a gift of clothing. If it fits, you may wish to keep it. If it doesn't fit, "return" it.

Clearly, an investor in Verizon could not simply return the gift. Verizon doesn't want it back. But, he could certainly sell it and buy something more appropriate. You can take the proceeds from the sale and buy more shares of Verizon in order to restore your Verizon holding back to the same percentage of your portfolio.

Just don't hold it because it was gift that you otherwise "would not have cause to own."

The Dividend

I own most of the telecom stocks largely for the current dividend yield. This includes AT&T (NYSE:T) with a yield of 4.6%, Verizon 4.5%, Frontier 8.4%, and Windstream 10%. I also own Comcast (NASDAQ:CMCSA), at 1.8%, which competes in the same space, and at times I have owned CenturyLink (NYSE:CTL), at 7.3%. These stocks represent a portion of my portfolio designed to provide steady income, and they come with some risk and some chance for increasing dividends. There is a reason I continue to own them.


As I noted, I enjoy the comments on Seeking Alpha more than the articles. They provide an opportunity to go beyond the content of the articles. The two comments above provided that opportunity and represent some very common views. They are also excellent reasons for the commenters NOT to own Frontier and to consider closing their positions.

Frontier cut the dividend a second time earlier this year, down to $0.40/ share. Despite the cut, it is still a stock that many investors own for the dividend, and it is the reason I own the stock.

Disclosure: I am long SIRI, FTR, VZ, WIN, T, CMCSA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have covered calls written against many of these positions. I may but CTL at any time and I occasionally day-trade FTR.