Yes, You Can Count On This Massive Dividend

Shareholders of rural telecom Frontier Communications (NYSE: FTR  ) are celebrating a terrific second-quarter report today, sending share prices up as much as 13% overnight. That's both the good news and the bad news. Rising share prices are cool if you plan to sell your holdings sometime soon, but dividend investors prefer their stocks to stay nice and cheap so their DRIP plans and cash investments buy more shares with higher yields.

Oh well. You can't have it all, right?

Sales sank 4.8% year-over-year to $1.26 billion, just ahead of Wall Street's $1.25 billion revenue target. Adjusted earnings rose 33% to $0.08 per share, again ahead of analysts who expected flat income year-over-year.

And the fun didn't stop there: Free cash flow jumped 18% to $285 million, which is more than enough to cover the roughly $200 million Frontier spends on dividends every quarter. Capital expenses did indeed slow down in the second quarter as unseasonably warm weather moved some of the planned infrastructure work ahead of schedule. That points to continued strong cash flows in the back half of the year.

Looking below the financial numbers, customer churn is falling as Frontier rolls out more flexible pricing plans. Phone line customers are signing off in droves, but that exodus is balanced by rising numbers of broadband and TV service customers.

So the good news overwhelmingly outweighs the bad this time. Frontier's dividends look a lot safer today than they did last night. The price jump reduced Frontier's dividend yield from 11% to 9% in one fell swoop, but wouldn't you rather own a stable single-digit dividend than a risky double-digit phenom that could be gone tomorrow?

For a recent example of collapsing mega-payouts, look no further than global telecom giant Telefonica (NYSE: TEF  ) . Last week, the company canceled a share buyback plan and scrapped its 11% dividend entirely thanks to rising competition and expensive network builds. The cash details in this report make Frontier unlikely to follow the Spaniard's dark path.

Frontier is such a tempting income stock that our top analysts have started in-depth coverage of the stock. Click here to get access to our brand-new premium report on Frontier, bundled with a full year of analysis and updates as the telecom moves into a brave new broadband world.

Fool contributor Anders Bylund holds no position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool has a disclosure policy.

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Read/Post Comments (3) | Recommend This Article (2)

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  • Report this Comment On August 01, 2012, at 8:36 PM, neamakri wrote:

    Okay, sounds good up to the 190% dividend payout, then not so good.

    To me that implies a near future dividend drop and corresponding stock price drop...

  • Report this Comment On August 02, 2012, at 7:52 AM, TMFZahrim wrote:

    @neamakri, I think you're basing that 190% figure on earnings. That's irrelevant. What matters is dividend payments as a percentage of free cash flows, which works out to 70% this time and seems unlikely to spike again in the next year or two. Beyond that, well, my crystal ball is in the shop for repairs, I'll have to get back to you when I find a decent Tarot deck.

    Anders

  • Report this Comment On August 03, 2012, at 10:36 AM, BCSkier wrote:

    TEF's dividend plan is not scrapped entirely - it has been suspended till 4th qtr of 2013.

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