Frontier: Is The 14% Dividend Worth The Risk?

| About: Frontier Communications (FTR)

Summary

Frontier Communications plunged 11% after reporting Q4 earnings.

The stock now offers a massive 14% dividend.

The market appears fearful of a board decision that doesn't impact the ability to pay the dividend.

Frontier Communications (NYSE:FTR) traded down 11% following mixed Q4 earnings. The stock now yields an incredible 14%, but investors were probably fleeing the stock for another reason.

The stock is down below $3 trading at lows not seen since 2013. Were the results that bad?

Frontier beat analyst estimates by $0.01 so the selloff wasn't likely due to the Q4 results. The continued decline in accounts is a concern, but the company offset this issue with an increase in the synergy estimates for the CTF business acquired from Verizon Communications (NYSE:VZ) for $200 million.

The real issue was the discussion that the board of directors approved a vote on a reverse stock split. The company is proposing a split of between 1-for-10 and 1-for-25.

Healthy stocks don't typically complete reverse stock splits so the selloff is in part due to the market selling on fears. The initial reaction is to assume the worse and to think this signals future weakness at the telecom.

Looking at free cash flows, the company hasn't really changed over the last few years. In fact, 2016 had the highest levels of cash flows during the period. The payout ratio was a solid 52% leaving a ton of flexibility to maintain the dividend going forward.

Frontier forecast 2017 cash flows staying in the same range of $800 million to $1.0 billion. The forecast supports the payment of the 14% dividend.

The fear in the stock is that the recent surge in the yield is reminiscent of previous rises right before dividend cuts.

FTR Dividend Yield (<a href=

FTR Dividend Yield (NYSE:TTM) data by YCharts

Despite the falling customer base, Frontier can keep the cash flows up due to the reduced operating expenses and lower capital spending in 2017. The numbers don't support the market fears suggesting a dividend cut.

The key investor takeaway is that the momentum in the stock and business makes me want to avoid the stock for now. The actual numbers support that the market is too bearish on Frontier Communications, but I don't want to jump into the stock before seeing some stability first.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

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