Frontier Communications: A 12% Dividend That's Just Too Good To Pass Up

| About: Frontier Communications (FTR)

Company Overview

Frontier Communications Corp (NYSE:FTR) specializes in the communications industry. It is primarily a phone company but also offers a whole range of other services including internet access and television services. As of the end of 2011, it operates in 27 states and services 5.3 million access line, and 1.8 million broadband connections. Its main competitors include CenturyLink (NYSE:CTL), Telephone & Data Systems (NYSE:TDS), and General Communication (NASDAQ:GNCMA).

In 2011, it recorded revenues of $5.243 billion, up $1.445 billion from the previous year, operating income of $900 million, up $128 million, and net income of $150 million, down $3 million. At the end of 2011, it had total assets of $17.461 billion, and total equity of $4.455 billion.

Investment Thesis

Frontier's compelling fundamentals are perhaps the most attractive thing about the company. The firm is focusing on an aggressive marketing strategy to add new customers while increasing customer retention rates. It is also developing its services and providing new products to its consumers.

Furthermore, Frontier is attempting to increase its profitability while expanding which seems to be somewhat successful over the short run. In 2011, it recorded free cash flows of $748 million, up $104 million from the previous year. It also managed to increase capital expenditures by $247 million to $825 million. This impressive leap in capital expenditures led to marginally lower net income of $150 million, down $3 million from the previous year. Therefore, investors in Frontier should expect a sharp increase in net income as it starts to profit off these investments. Also, its acquisitions of certain Verizon assets are expected to produce strong profits and create steady cash flow while saving hundred of millions for the company in the form of lower costs.

Dividend Opportunity

Frontier has a very high dividend of 12.0% which is partly due to the falling share price. Nonetheless it can easily support this high dividend as it is supported by a strong free cash flow. Frontier recorded cash from operations of $1.573 billion in 2011. It already spends over half of its cash from operations on capital expenditures, $825 million. Therefore, it had a free cash flow of $748 million which it had free to spend on tackling debt levels and paying shareholders back in dividends. Its debt to equity ratio is just 1.7 compared to an industry average of 2.4. Consequently, it can easily tackle its debt while maintaining steady dividends to shareholders.

Frontier has paid a dividend in the past so there is no reason to suggest it won't continue to in the future. The dividend declined almost 50% this year to just 10 cents, however, this is not due to bad margins but rather expansion. The company's acquisition of some of Verizon's assets meant that it had to sacrifice some of the dividend to help long term growth. This should be an attractive sign for long term investors that the company is more concerned with consistent and high long term growth then poor results in the short term. Frontier should benefit hugely from its new assets as soon as it has them fully integrated.


However, Frontier does carry some risks. Primarily, competition is an issue which may force Frontier to lower its pricing, consequently hurting its revenues. Frontier faces competition across its diversified range of products and services which will continue to plague it as it tries to move forward. However, Frontier has positioned itself well in the market as an efficient carrier, and has already implemented important cost cutting strategies to try to counter any declining revenues. The cutting of the dividend has also given itself some monetary leverage if it is needed.

Another potentially problematic issue for the company is a decline in regulatory funding. Frontier does get important subsidy payments from the Federal Universal Service Fund which are continuing to decline. However, Frontier has grown very well over the past few years. From 2009 to 2011, revenues grew by 250%. Therefore, it relies less and less on these payments to conduct its business.


Frontier Communications Corp presents a mouth watering dividend opportunity for any investor. The dividend is safe and will likely increase as soon as the integration of Verizon's assets is complete. It might even go back to its old level by 2013 which would mean the company would pay more than a 20% dividend at the current price level. However, if you are looking for value, Frontier has that too. Morningstar rates its fair value $6.50 per share, and advises that one should consider buying at $3.90. It also gives it a 5-star rating. Therefore, it is certainly a buy for the value investor as well.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FTR over the next 72 hours.

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