Frontier: More (or Less) Than Its Dividend?

For a company like Frontier Communications (Nasdaq: FTR  ) , which has made a point of strutting out its dividend as a major selling point to investors, should one be concerned that not once did it raise that topic during its presentation at the Goldman Sachs Communacopia Conference last month?

Actually, the question of dividends had to wait until it was brought up by two members of the audience (not by the Goldman analyst on the dais) during the brief Q and A open to the onlookers.

Don Shassian, Frontier CFO, said:

Dividend policy? Dividend policy. It's $0.10 a quarter, $0.40 a year. We lowered that dividend last year to be able to enable us to use excess free cash flow to pay down debt ... and then the board will look at getting back into a much more shareholder friendly mode, which is the way we've always been whether that's dividend, share buybacks, etc.

Well, the dividend was more than just lowered last year. It was halved at the end of 2011 to reflect Frontier's nosedive in earnings. See the chart below:

FTR Dividend Chart

Frontier Dividend data by YCharts.

As you can see, the share price followed earnings and (and the dividend) downward. Yet, Frontier's share price since that low point in May of this year has increased by around 50% to this point. Does this mean we should expect good news when Frontier reports its third-quarter earnings? We'll have to wait until early November to find that out.

When last we looked at Frontier's ability to keep paying out a dividend that currently yields a handsome 8.45% -- that was the second quarter of this year -- it sported a 56% dividend-to-free-cash-flow payout ratio. If the company can keep that going, then there shouldn't be a problem meeting the next dividend payment. But if that shoots up to an unsustainably thin place, say, 97.6%, which it did for last year's third quarter, then investors should tighten their belts because another dividend diet will likely be in the offing.

Interested in learning more about this high-yielding telecom? Read this premium research report on Frontier Communications. We will walk you through all of the key opportunities and threats facing the company. Better yet, you'll receive a full year of updates to boot. Click here to learn more.

Dan Radovsky owns shares in Frontier. The Motley Fool has no positions in the stocks mentioned above. 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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  • Report this Comment On October 12, 2012, at 1:39 PM, ctoph27 wrote:

    Personally, I'd prefer to see them lower the dividend to 5%. The payout ratio is simply unsustainable even if they do have earnings growth. I'd prefer to see them use the extra cash to continue cleaning up the balance sheet or start buying back shares. That should help earnings or at the very least will drive the share price upwards. Then once they have a good earnings trajectory (which should increase the stock price), they can start increasing the dividend to keep it around the 5% mark. Anything more than 6% is absurd. Although I bought this stock at $4. I'd like to hear those who bought it at $10 if they share the same belief. It's easy for me to dictate what they should do since I already have a nice profit.

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