Buy, Sell, or Hold: Frontier Communications

When it comes to investing, knowing when to buy, sell, or hold a stock can mean the difference between making money and losing it in the market. However, making the best decisions for your investments can be challenging. Fortunately, investors can minimize risk by weighing both the pros and cons of a given stock before deciding how to act. This can be particularly important want you're considering high-yielding dividend stocks like Frontier Communications (Nasdaq: FTR  ) . Today, Let's take a closer look at the telecom giant and evaluate whether investors should buy, sell, or hold this name.

Buy
Who doesn't like investments that return sizable checks on a regular basis? If you're looking for sky-high dividend yields, you've come to the right place. Frontier Communications now pays $0.10 a quarter, and has a yield north of 8%. While that's down from 12% last year, it's significantly higher than the 1.97% average yield of the S&P 500. Meanwhile, Frontier's most recent dividend cut gives the stock a more manageable payout plan, which is good for the long-term vitality of the company.

The fact that Frontier dominates small markets in rural areas lessens the threat of competition. This makes it harder for people to switch from Frontier to another provider, which helps keep churn rates low. The company's landline voice plans, as well as Internet, data, and video services currently span 27 states.

Additionally, Frontier is quickly integrating the rural assets it acquired from Verizon (NYSE: VZ  ) back in 2010. For Frontier, the deal meant millions of new customer accounts spread across 14 states -- making Frontier Communications the largest provider of rural telecom services in the U.S. The company should continue to benefit from the increase in subscribers and longer-term cost savings of Verizon's local operations in these states. Still, new customers alone may not be enough to counter more affordable alternatives from carriers such as Verizon and AT&T (NYSE: T  ) .

Sell
Thanks to advances in mobile technology, wireless providers such as Verizon and AT&T are expanding their networks to bring cheaper services to rural areas. Frontier teamed up with AT&T to resell the carrier's collection of smartphones and network services to its customer base. However, I doubt this will be enough to counter losses in its core phone business.

Customers are increasingly switching from landline phones to wireless services, which could explain why Verizon didn't hesitate selling its rural territory to Frontier. On top of this, Frontier is faced with the challenge of revamping many of the territories it purchased from Verizon -- no small task. Looking ahead, if Frontier's residential and business landline users disappear faster than currently expected, the stock's dividend could be in jeopardy. For these reasons, investors may want to consider a rural telecom like Windstream (Nasdaq: WIN  ) instead.

Thanks to its recent acquisition of broadband service provider PAETEC, Windstream should be better equipped to compete with bigger competitors such as AT&T and Verizon. And with an attractive yield of 9.6%, Windstream knows how to spoil shareholders. CenturyLink (NYSE: CTL  ) is another dividend player that joins Frontier and Windstream on the coveted list of telecom's most generous dividend stocks. True, CenturyLink's dividend yield of 7% is markedly below the others, but it looks like the most sustainable.

Similar to Frontier, Centurylink is struggling with declines in its landline business. Yet the company is also investing in other revenue channels such as cloud computing, acquiring Qwest and SAVVIS last year. High-margin services like cloud computing and high-speed Internet should help CenturyLink significantly boost its future cash flows. That's more than Frontier can claim. In fact, the Verizon transaction didn't do Frontier any favors in terms of its rising debt load. With more than $8 billion in net debt, Frontier needs to focus on upselling customers higher-margin services like broadband Internet.

Hold
One of the biggest mistakes an investor can make is to value a stock by its yield alone. Frontier Communications may have an impressive yield, but if it can't maintain its payout, the stock is worthless. Just because a stock boasts an attractive payout doesn't mean it's a high-quality stock. Let's not forget that Frontier has already slashed its dividend twice in the last two years. For these and many other reasons, more conservative investors may want to sit tight for now.

Final answer
As much as I like Frontier's dividend, I think the risks currently outweigh the rewards. Relentless competition from wireless carriers and a dying landline business could further threaten Frontier's ability to generate cash. I'd also like to keep an eye on the company as it works out the final bugs in its purchase of Verizon's assets.

Despite all of the challenges facing Frontier, opportunities in broadband Internet and business phones offer some upside. If you're drawn to the stock despite the inherent risks, you'll want to read the Fool's new premium research report on Frontier. In it, you'll discover key opportunities and risks facing the company as well as in-depth analysis on where the stock is headed. Avoid high-yield purgatory by getting all the inside details on this company, as well as a full year of timely updates on the stock. Simply click here to get your copy of the report now.

Fool contributor Tamara Rutter does not own any stocks mentioned in this column. Follow her on Twitter, @TamaraRutter, for more Foolish insights and investing advice. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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