Can This Dividend Darling Make It Work in 2012?

A little recap first: Frontier Communications (NYSE: FTR  ) tripled its subscriber base when it bought Verizon's (NYSE: VZ  ) cast-off rural phone lines in 2010 for $8.5 billion. Unfortunately, those former Verizon properties had been losing customers at a high rate -- 12% in 2009 under Verizon, and 10.5% under Frontier as of July 2010.

That attrition accounted for an 8% third-quarter revenue loss compared to the same quarter last year. Fortunately, that was mitigated somewhat by a 3.5% decrease in operating expenses over the same period. But net income dropped a whopping 33%. That's the bad news.

The good news is that Frontier's free cash flow actually increased by 3%, which is quite significant for paying off its increased debt load from the Verizon purchase, and making its all-important dividend payout.

What Frontier is facing in 2012
The company has got to do a better job of subscriber retention. Once Frontier loses customers, it's going to be much harder to win them back. But some of the moves the company made in 2011 makes one think that keeping its residential customers may not be its highest priority.

Frontier CEO Mary Wilderotter announcing that to make up for Verizon's poor customer service in its new markets, "What we care about is keeping the customer ... and making sure the customer is happy." Yet it wasn't long before Frontier:

  • Raised FiOS prices by 46% in Indiana, Oregon, and Washington (where Comcast (Nasdaq: CMCSA  ) offers much cheaper pricing).
  • Raised the cost of FiOS installation from $79 to $500 for Oregon customers.
  • Forced DSL customers to rent their modems, with fees at $7 to $15 per month.
  • Was sued for allegedly collecting an illegal "HSI surcharge," which plaintiffs claim is a "junk fee" used by Frontier to "increase prices above advertis[ed] prices."

It seems that Frontier is seeing the writing on the wall for traditional fixed-line telephone services and for Internet services as well. Those FiOS price increases may have been done purposely to entice those customers to switch over to satellite service provider DIRECTV (Nasdaq: DTV  ) as an alternative. And we should expect to see more of this switching to satellite providers as Frontier renewed its association with DISH Network (Nasdaq: DISH  ) .

Look Ma, no wires
Look for Frontier to push its newfound wireless broadband capability, which it acquired from the three-year reselling agreement it made with AT&T (NYSE: T  ) . Rival wireline carrier CenturyLink (Nasdaq: CTL  ) will also be competing in the wireless world with the reselling agreement it made with Verizon.

And Frontier should also attempt to expand its business Ethernet coverage in the coming year. It now services medium- and large-sized businesses in 55 markets. This is a segment that Wilderotter said provided "51% of our revenue and a big upside for revenue is in commercial services."

With cable companies now moving away from video and toward data streaming -- as well as making their own long-term wireless reselling arrangements with the major mobile carriers -- Frontier will be facing competition from all directions in 2012. Keeping a healthy cash flow going in order to continue to deliver those dividends will be a continuous challenge.

I own shares of Frontier, but I can't say I would relish them as my telecom provider. However, putting aside what I think about the way they have treated some of their residential customers, I am drawn by its 15.5% yield -- and its price, which has dropped 50% over this past year. The price could now be right, but I'm going to hold off a bit before pulling the trigger again.

Foolish bottom line
Frontier offers one of the highest yields around, which offered some solace for the tumble in price it took this year. But if trading away some dividend yield for less volatility is more in line with your investing style, then check out this report from Motley Fool analysts: "Secure Your Future With 11 Rock-Solid Dividend Stocks." It's free!

Fool contributor Dan Radovsky owns shares of AT&T and Frontier. 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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