Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Is Frontier Communications a Buffett Stock?

As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands try to glean what they can from his thinking processes and track his investments.

We can't know for sure whether Buffett is about to buy Frontier Communications (Nasdaq: FTR  ) -- he hasn't specifically mentioned anything about it to me -- but we can discover whether it's the sort of stock that might interest him. Answering that question could also reveal whether it's a stock that should interest us. In this series, we do just that.

Writing in a recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:

  1. Consistent earnings power.
  2. Good returns on equity with limited or no debt.
  3. Management in place.
  4. Simple, non-techno-mumbo-jumbo businesses.

Does Frontier meet Buffett's standards?

1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.

Let's examine Frontier's earnings and free cash flow history:

Source: S&P Capital IQ.

Because of large depreciation charges for legacy assets, it's fairly common for telcos to generate significantly higher free cash flow than net income. Frontier is obviously no exception. Over the past five years, Frontier's earnings have held steady, while its free cash flow has soared, in large part due to its purchase of 4.8 million Verizon landlines.

2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it is.

Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.

While historically Frontier has generated a moderately high return on equity, that figure has shrunk significantly over the past couple of years after its equity grew dramatically. I'm not especially concerned, however, as Frontier managed to generate a reasonable 13% free cash flow return on equity over the past year. Its debt-to-equity ratio of 186% may seem large, but it's well within the normal bounds of the telco industry.

3. Management
CEO Mary Wilderotter has been at the job since 2004. Before starting at Frontier, she worked at MicrosoftAT&T, and McCaw Cellular.

4. Business
Integrated telecommunication isn't particularly susceptible to rapid wholesale technological disruption, though over the medium to long term, wireline and long-distance communication is becoming increasingly supplanted by mobile phones.

The Foolish conclusion
So is Frontier a Buffett stock? It's a mixed picture. The company has consistent earnings and free cash flow and tenured management. On the other hand, it doesn't generate particularly high returns on equity with limited debt, and its industry is in a state of long-term decline -- something that would likely worry Buffett, whose favorite holding period is "forever." If you're looking for some solid dividend stocks, I also suggest you check out "Secure Your Future With 9 Rock-Solid Dividend Stocks," a special report from the Motley Fool about some serious dividend dynamos. I invite you to grab a free copy to discover everything you need to know about these nine generous dividend payers -- simply click here.

Ilan Moscovitz doesn't own shares of any company mentioned. 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.

Read/Post Comments (1) | Recommend This Article (3)

Comments from our Foolish Readers

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 April 23, 2012, at 4:29 PM, NeuroProf wrote:

    So doesn't Frontier provide internet to its mostly rural customers who can't get internet any other way? Mobile signals are also lousy in many rural areas, so mobile data service is not a competitive threat either...and many rural folks use the internet to boost their mobile phone signals...Maybe there is a niche for FTR for the long run...

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1856374, ~/Articles/ArticleHandler.aspx, 10/27/2016 7:18:34 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 10 hours ago Sponsored by:
DOW 18,199.33 30.06 0.17%
S&P 500 2,139.43 -3.73 -0.17%
NASD 5,250.27 -33.13 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/26/2016 4:00 PM
FTR $4.09 Down -0.02 -0.49%
Frontier Communica… CAPS Rating: ***