Frontier Is Fixing Verizon's Problems

You know, I'm starting to think that Frontier Communications (NYSE: FTR  ) is run by some smart people.

When the rural telecom operator first announced that it was paying $8.5 billion to Verizon (NYSE: VZ  ) to take over Big Red's wireline operations in 14 states, the plan seemed a bit bonkers. Economies of scale are one thing, but nearly tripling in size overnight while almost doubling the company's debt load and diluting its stock something fierce simply couldn't be a good idea. After all, Verizon was selling these assets for a reason. It's difficult and expensive to run a mostly small-town network of voice and data communications. Why would Frontier do a better job at it than Verizon?

As it turns out, Frontier knows how to do a lot of things right where Verizon was doing it wrong. According to CEO Maggie Wilderotter, "Verizon has not been doing much in those markets from an advertising or engagement perspective over the last several years." By contrast, Frontier is stepping hard on the marketing pedal and reversing some consumer-phobic policies of the old owner. For example, Verizon wouldn't sell lower-priced DSL service in territories also covered by its fiber-optic FiOS service, but Frontier will. If you wanted TV service in those areas before, FiOS TV was the only choice -- now, Frontier is happy to market a choice between FiOS and DIRECTV (Nasdaq: DTV  ) .

"In our vernacular, what we care about is keeping the customer, getting the customer to take more products and services from us and making sure the customer is happy with the choice points," Wilderotter said. It's all about customer choice. I hear echoes of the policy that made Google (Nasdaq: GOOG  ) great: "Focus on the user and all else will follow." Whole Foods Market follows a similar path in retailing. You may have noticed that Apple CEO Steve Jobs values user-friendly design above all else. It might sound like a stretch to put crusty old telecom Frontier in that kind of context, but I think that's the right way to think about its assets, including the hefty tack-on properties it just bought from Verizon.

While the impending Qwest (NYSE: Q  ) and CenturyLink (NYSE: CTL  ) tie-up might be more of a merger of equals, they'd be wise to closely watch Frontier's progress. The relative success of Frontier's early integration seems to be a good indicator the two companies will be able to squeeze out synergies that were waved in front of shareholders when the deal was announced.

Comparing sales and earnings year-over-year or even quarter-over-quarter is sort of pointless right now, because the Verizon transaction messes up every calculation. From the financial results, I'd focus on this tidbit: free cash flow increased from $120.3 million a year ago to $339.1 million this time around, easily fueling Frontier's 8.3% dividend yield. Management is "very committed to maintain your $0.75 annual dividend," and the cash flows will support that policy -- especially once Frontier completes the overhaul of Verizon's strange policies and starts reaping the rewards of those changes.

If you know of a better-looking dividend play than Frontier today, you're a better income hunter than me. Feel free to share your exploits in the comments below.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. Google is a Motley Fool Inside Value recommendation and a Motley Fool Rule Breakers selection. Apple and Whole Foods Market are Motley Fool Stock Advisor picks. The Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 09, 2010, at 2:54 PM, greekthug wrote:

    check out youtube by greekthuglife69 see how verizon treats their workers u already know how they treat u i bet frontier wont do that u see they r cleanin verizon mistakes up as we can see

  • Report this Comment On November 09, 2010, at 4:40 PM, doninvest1 wrote:

    I assumed the sell off when merger occurred was the dumping of unwanted shares ! It seemed at the like a good investment with a good dividend. I now have a 30 % gain plus a reasonable dividend. However I would like to thank the sellers. Let me know when you hear of another giveaway program.

  • Report this Comment On November 09, 2010, at 4:50 PM, Fedupemployee wrote:

    Oh please! No one could possibly treat their employees any worse than Frontier.

    http://www.363united.blogspot.com/

    And then there are those businesses that lost their service during the transition:

    http://stopthecap.com/2010/10/14/more-frontier-service-outag...

    This CEO is a heartless b*tch. She cried money problems last year, asked the unions to take furlough then turned around and bought the Verizon lines. She's a liar through and through. But I guess if YOU make your money what do you care?

  • Report this Comment On November 09, 2010, at 5:00 PM, highwatermark wrote:

    As a customer that had been with Verizon and is now with Frontier, the whole "keeping the customer happy" idea is a great one, but one that is not happening on the ground. We just canceled our FIOS TV service and will be canceling our phone service soon. And if I had a boradband provider that wasn't Comcast, I'd drop FIOS internet too. From my perpective as a consumer, its pretty clear that Frontier just can't handle the take-over effectively. Two-thirds of their website pages still says Verizon, links don't work properly, and their phone support is nearly as confused and unhelpful.

    If you are interested in Frontier because of what they're saying about how to treat their customers, then you might want to hold off a little while. I suspect I'm not the only one that's grown weary of the technical glitches and other problems that the switch to Frontier has created. It will be interesting to see how many former Verizon customers Frontier has left when they finally get the takeover completed, and whether they can earn back those customers that got tired of waiting.

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