3 Reasons Things Could Get Rough on the Frontier

When you can sum up a company's fortunes with the word "declining" that's not normally a good sign.

Feb 4, 2014 at 7:00PM

One of the significant differences between companies that have sustainable dividends and those that may not is how much they talk about their payout. Solid companies don't talk about payout ratios because their numbers speak louder than words.

By contrast, it seems like every earnings report from the local telecommunications sector is devoted to convincing investors that these fat yields are safe. The problem for Frontier Communications (NASDAQ:FTR) investors is, their false sense of security could catch them unaware of a looming dividend cut again.

This problem starts at the top
It's no secret that the local telecom business isn't a growth industry. With thousands of customers choosing to cancel their landlines in favor of their cell phones, this business has been difficult for several years. While the local players are fighting back by offering high-speed Internet and premium video services, it's hard to project when or if these companies will ever witness real growth.

With this in mind, when a company like Frontier reports that overall revenue declined by more than 5% year over year, it's not a surprise. However, when you realize that its competition CenturyLink (NYSE:CTL) and Windstream (NASDAQ:WIN) reported revenue declines of 1% and 3%, the obvious question is, what did Frontier do wrong?

This is the first and most obvious reason investors in Frontier could be in for a rough ride. In a struggling industry, you don't usually want to own the company that reports the greatest decline in revenue.

An often overlooked warning sign
In personal finance, it is pretty easy to understand that you don't want to pay too much interest on debt you owe. For some reason, the same investor who would never pay a high interest rate on their credit is more than willing to invest in a company that is up to its eyeballs in interest payments.

The telecom industry requires a lot of capital so it's not unusual for these companies to take on debt. However, just like when an individual takes on too much debt these payments can cause problems. One way to try and determine if a telecom is carrying too much debt is by looking at the company's interest expense compared to its operating income during the current quarter.

The second reason the ride could be rough for Frontier investors is, last quarter the company reported that more than 79% of the company's operating earnings were used on interest expenses. Even if you adjust for the company's $40 million pension expense, Frontier still used more than 66% of its operating income on interest. Looking at last year's linked quarter, Frontier used about 62% of operating income on interest.

By comparison, Windstream carries a relatively high level of debt, but the company used about 63% of its operating income on interest in the last quarter. Of the three local telecoms, CenturyLink spent the least on interest at 49% of operating income. Simple math says if Frontier continues to use a higher percentage of its operating income on interest compared to its peers, that the company won't have as much for dividends and other expenses.

This shouldn't be a surprise
What do you get when a company's revenue declines faster than its peers, and that same company spends relatively more on its debt? In short, you get Frontier reporting that its operating cash flow declined faster than its peers.

This is the third reason the ride could be rough for investors. Frontier reported in the nine months that ended in November, that core operating cash flow (net income + depreciation) declined by almost 14% on a year-over-year basis. Given that Windstream's operating cash flow was flat, and CenturyLink actually witnessed a near 5% increase, Frontier's performance is particularly troubling.

Don't be foolish
The Motley Fool encourages Foolishness, but underestimating the problems facing a company isn't the type of foolishness (note the lowercase f) we're talking about. On the surface, Frontier's over 8% yield seems appealing, the company seems to mention in each earnings report that its dividend is well covered.

However, good companies with safe dividends don't have to talk about their payouts. With mounting challenges facing Frontier, unaware investors could be in for a bumpy ride.

Here are nine rock-solid dividend stocks, courtesy of The Motley Fool
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it’s true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor’s portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Chad Henage owns shares of CenturyLink. The Motley Fool has no position in any of the stocks 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers