Is This Huge Dividend Still Safe?

Dividend champion Frontier Communications (NYSE: FTR  ) has gone through some serious changes lately.

After completing a bet-the-farm acquisition of rural accounts from Verizon (NYSE: VZ  ) , Frontier set about upgrading the new assets in order to comply with government-imposed conditions for the deal. The company has been pumping a huge part of its cash flows into that juicy 10% dividend yield, even as it rolls out expensive infrastructure upgrades on the old Verizon stuff.

And so we arrive at this morning's second-quarter report. Sales more than doubled year over year to $1.3 billion, while earnings fell by 8% to $32 million, or by 45% to $0.06 per share when you account for the massive dilution that came with the Verizon deal a year ago. All of this was in line with Wall Street estimates, but investors weren't impressed; shares swooned as much as 8.1% on the news before climbing back to a less preposterous fall.

I don't quite see why you'd hate this report. CEO Maggie Wilderotter noted that cost savings from the integration of Old Verizon and New Frontier is running ahead of schedule, and she increased her annualized savings target from $550 million to $600 million. With $231 million of free cash flow in the quarter, the dividend payout ratio landed at 77% -- within spitting distance of last quarter's 74% payout. Let me remind you here that the astronomical payouts are expected to trail off in coming quarters as capital expense needs decrease.

Frontier's dividends are more generous than those of fellow telecoms France Telecom (NYSE: FTE  ) , Windstream (Nasdaq: WIN  ) , or AT&T (NYSE: T  ) , and are amplified if you buy in during temporary drops like this morning's. I happen to have chosen France Telecom as my own income-payer in this sector, but could easily have gone with Frontier, too.

To see 13 more high-yielding stock ideas for your portfolio, check out this free report on top-notch dividends. These stocks could be your best bet to beat inflation in years to come as bonds and savings accounts yield mere pennies on the dollar.

Fool contributor Anders Bylund owns shares of France Telecom but holds no other position in any of the companies discussed here. Motley Fool newsletter services have recommended buying shares of France Telecom and AT&T. 

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  • Report this Comment On August 03, 2011, at 10:28 PM, TMFZahrim wrote:

    Just to clarify, I am absolutely not saying that Frontier is about to cut its dividend payouts. What the company actually plans to lower is the payout ratio, or the pe4rcentage of free cash flows that's paid out as dividends. It's supposed to happen by way of lower capital expenses, meaning higher cash flows, so the same dividend expense becomes a smaller portion of the cash use. I got emails worrying about this, and I apologize if it wasn't made clear in the article.

    Anders

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