This Huge Dividend Is Safe

If you worried that Frontier Communications (NYSE: FTR  ) would have to slash its dividend deeply to get through this period of heavy infrastructure spending, it's time to breathe a sigh of relief.

When Frontier acquired a bushel of rural phone networks from Verizon (NYSE: VZ  ) , regulators put some stipulations on the deal. The biggest one was a requirement to give broadband access to 85% of households in Verizon's old territories by 2013. Verizon had extended DSL or fiber-optic FiOS services to only 65% of those households as the contract was signed, leaving a lot of heavy lifting to be done by Frontier.

Frontier's capital expenses have indeed skyrocketed. A year ago, the company spent $70 million on network upgrades and maintenance in the first quarter. In the first-quarter report for 2011 that was just released, that figure jumped to $209 million -- a nearly threefold increase. Those required network builds are costly.

Frontier did lower its quarterly dividend from $0.25 per share to $0.19 per share when the Verizon deal was finalized, mostly because the mostly stock-based deal increased Frontier's share count from 310 million to 989 million overnight and put increased stresses on Frontier to keep cash rolling in while it performed integration and upgrades. That doesn't mean that Frontier is pinching payout pennies -- all told, the quarterly cost of those dividends rose from $78 million to $187 million year-over-year.

"Our dividend payout ratio, as expected and by design, was higher at 74%," said CEO Mary Wilderotter. The capital costs should shrink in the near future, thus increasing Frontier's free cash flows and reducing the dividend payout ratio. At 74% of free cash available, the payout ratio is dangerously high right now, but:

  • It's by design and not by accident.
  • It's a short-term issue that should go away over the next few quarters -- keep an eye on the payout ratio!
  • It's still low enough to preserve some cash flow all the way to the bank.

In my eyes, these ameliorating factors make Frontier's dividend safer than other seemingly risky payout prospects:

Company

Dividend Yield

Regular and Special Dividends Paid, LTM (in millions)

Free Cash Flow, LTM (in millions)

Payout Ratio (Dividends / FCF)

Frontier

9.0%

$638

$896

71%

PDL BioPharma (Nasdaq: PDLI  )

9.3%

$150

$144

104%

Sycamore Networks (Nasdaq: SCMR  )

28.7%

$185

$0

N/A (Special dividends supported by large amount of investments and cash.)

Source: Capital IQ, a division of Standard & Poor's.

Frontier's commitment to rural broadband is on track with 323,000 out of 1 million planned new households already connected. And in spite of some problems retaining FiOS customers, Frontier is managing to post strong gains in broadband. Excluding some FiOS losses, the company added 15,000 broadband customers during the quarter. In other words, Frontier is not pumping money into a black hole just to appease the FCC; it's making an active investment in the future of its business and reaping the dividends.

Find another generous helping of supreme and safe dividends right here:

Fool contributor Anders Bylund owns shares of no companies listed above. 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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  • Report this Comment On May 10, 2011, at 3:21 PM, mikecart1 wrote:

    The payout ratio for FTR is over 300%. On top of that people are canceling their wireline telephone services more and more and just using a cell phone service which is dominated by VZ, S, and T. This dividend is about as safe as WWE's. We all know what happened to that one.

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