Can You Count on a 6.6% Frontier Communications Yield?

Callable Bonds

frontierFrontier Communications (NYSE:FTR), now the largest rural telecom company in the U.S., has long been a favorite of mine, although it tested my devotion a few years ago when it cut its dividend twice in six months, from $1.00 a year to 40 cents.  Since then, though, the dividend has held steady, for a handsome yield of 6.6%. The question is, can you count on it?  I think you can. Here’s why.

Back in 2011, Frontier Communications yield was an eye-popping 13.7%.  The problem was that the company’s customer base was largely in land lines, a technology that is giving way to wireless telephones.  As a result, the company was losing customers and its revenues and free cash flow were declining at an alarming rate.  While FTR had been generating free cash flow twice equal to twice its dividend expenditures, by 2011 dividend payouts consumed virtually all of the company’s free cash – ergo, the cuts in September of that year and March of 2012.  The stock cratered from north of $7 at the beginning of 2011 to $2.68 by mid-May 2012, two months after the second dividend cut.

What’s different? For one thing, the stock price climbed back to as high as $6.06  as of May 9, 2014. And that’s because management took on a number of initiatives to grow its broadband and video businesses, slow the loss of landline customers, increase its revenue per customer and cut costs – all of which are paying off.

In 2013, FTR added a net 112,000 higher-revenue broadband customers, more than the total it had added in the three previous years, and it broadband Internet base now stands at more than 1.9 million customers.[1]  The company slowed the rate of loss in its landline business from 7% a year to 3%, and cut its operating costs by $94 million. It also negotiated to buy all of AT&T’s landline, video and satellite TV customers in Connecticut in a deal it expects to close in the second half of 2014.

Through all of this, FTR has maintained a healthy free cash flow, with an average trailing 12-month total of between $819 million and $928 million over the last five quarters.[2] That means that its dividend expense is back to around 50 percent or less of FFC, a very sustainable rate.

Which is all well and good if the company’s earnings grow, and over the last five years they haven’t – in fact, they’ve shrunk at a rate of about 10 percent a year. But now the Wall Street consensus is that FTR’s earnings are going grow over the next five years, at a fairly robust annualized rate of 13%.[3]  Put that together with the cash flow trend, and it looks to me like you certainly can count on FTR’s current 6.6% yield for some time to come. That beats the telecom industry’s average yield of 4.9%, and even the big boys’, Verizon’ 4.4% and AT&T’s 5.1%.

[1]   All data in this paragraph is from FTR’s 2014 10-k  annual report; see http://quote.morningstar.com/stock-filing/Annual-Report/2013/12/31/t.aspx?t=XNAS:FTR&ft=10-K&d=cc32e6059b5f5ac81871239e38b14615

[2]   http://seekingalpha.com/article/2213823-frontier-communications-efforts-to-deal-with-competition-and-secular-changes-in-industry-pay-off

[3]   http://seekingalpha.com/article/2213823-frontier-communications-efforts-to-deal-with-competition-and-secular-changes-in-industry-pay-off

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Lawrence Meyers

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