Can Frontier Communications Maintain Its Healthy Dividend?

As investors, we want to earn the highest possible return possible. However, the uncertainty of today's environment really makes it difficult to forecast future returns. One way to make sure we earn our keep is to focus on dividends. That way, we get paid cash in quarterly installments and are not at the mercy of Mr. Market's mood swings.

Frontier Communications (NYSE: FTR  ) pays a juicy 9.6% dividend yield, which ensures multiple repeat appearances on dividend investors' radars. This raises the question: Is the dividend sustainable? Let's take a look at the company to make a more informed decision.

Making a splash
After paying a quarterly dividend of $0.25 for six years, Frontier cut its dividend to $0.1875 last September. This followed its acquisition of Verizon Communications' (NYSE: VZ  ) wire-line business in 14 states. As a result of this transaction, Frontier positioned itself as a force among rural telecommunications carriers in the United States.

Not surprisingly, this acquisition changed the landscape of the company. First, Frontier's shares outstanding went from 313 million shares to nearly a billion. Also, long-term debt rose to $8.3 billion immediately following the acquisition, from its previous level of $4.8 billion. After assessing the new combined entity, management decided that the lower payout was appropriate.

Tracking recent performance
The company's most recent quarterly presentation showed revenue declining for four straight quarters on a pro forma basis. The decline was more pronounced in its residential segment, although the business segment declined as well. This is not surprising, since we would expect wireless adoption to be taking customers away from landlines.

There certainly are glaring negatives, but there are also some bright spots. As revenue has declined, the company has also reduced its operating expenses. The company reports cash operating expenses down 8% from the second quarter of 2010. Moreover, Frontier has been adding broadband availability to homes, with 10,500 net broadband additions in the latest quarter. While Frontier has its set of problems, it appears management has a plan going forward, which includes increased broadband adoption and controlled expenses.

Let's see how Frontier stacks up compared to some of its peers:

Company

Forward P/E

Yield

5-Year Annualized Dividend Growth

Frontier Communications 18.0 9.6% (4.1%)
Windstream (Nasdaq: WIN  ) 15.8 7.9% 0%
France Telecom (NYSE: FTE  ) 7.6 9.7% 7.0%
AT&T (NYSE: T  ) 13.4 5.7% 5.3%

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

What jumps out to me is Frontier's negative dividend growth relative to the others, but we know it's due to a one-time occurrence after the big acquisition. Hopefully, management is able to grow revenue going forward so that the dividend payout stays steady long into the future.

Foolish bottom line
With its high dividend payout, Frontier will continue to draw investors' attention. The yield appears sustainable for the short term, but there are things to watch, such as the slow decline of the company's number of subscribers. To battle this trend, Frontier has been focusing on cutting operating expenses and investing in broadband. Only time will tell whether this strategy will work, but it's nice to know management's working on it.

Interested in Frontier Communications? Add it to your Foolish watchlist.

Paul Chi has no positions in any companies mentioned. Motley Fool newsletter services have recommended buying shares of France Telecom and AT&T. 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. The Motley Fool has a disclosure policy.


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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 July 25, 2011, at 2:27 PM, mhonarvar wrote:

    unless you got the shares as part of the deal with Verizon...your money could be in one of the other telecoms mentioned in the article...

  • Report this Comment On July 26, 2011, at 9:06 AM, dunkmaster wrote:

    yes it could be....and your point?

    did you mean to say "should"?

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