The Dividend Cut No One Sees Coming

Just because it's not a problem right now doesn't mean it's not a problem at all. Investors in Frontier should avoid getting too comfortable.

Feb 24, 2014 at 5:00PM

One of the worst scenarios for an investor is when a stock in his portfolio has a dividend cut that no one expected. Typically, the stock price then falls because the dividend is cut and the yield is less attractive. To find balance, the stock must fall enough to make the yield attractive again. Existing investors not only have less potential dividend income, but a loss of capital as well. Frontier Communications (NASDAQ:FTR) stockholders have experienced this scenario and may think they don't have to worry, but there are signs the company's lower dividend may not be safe.

This is growing, and that's not a good sign
Growth is one of the key measures for investors in a company like Frontier. The company, along with rivals Windstream Holdings (NASDAQ:WIN) and CenturyLink (NYSE:CTL), is trying to find a way to stem the flow of voice line losses.

To build their other businesses, each of these companies has issued debt to raise money for expenses. On the surface, it looks like Frontier lands between its two peers with respect to relative debt. Frontier sports a debt-to-equity ratio of about 2, whereas CenturyLink is at 1.2 and Windstream is at a staggering 10.

However, the story isn't quite that simple. In the last three years, Frontier's debt-to-equity ratio has risen from approximately 1.5 to 2, and the company's long-term debt has risen about 2% in just the last four quarters. If Frontier continues down this path, the company's interest charges could become a problem.

Actually, now that you mention it
Frontier's rising debt load is already becoming a problem. One of the best ways to determine if a company is spending too much on debt is by comparing its interest expense to its operating income. After all, if the company spends a lot on interest expense, there won't be money left over for capital expenditures or dividends.

As a percentage of Frontier's operating income, the company is spending 66.5% even if we adjust for a current quarter pension expense. By comparison, Windstream is spending 62.6% of its operating income on interest expenses and CenturyLink is only spending 49%. Unless Frontier finds a way to grow its operating earnings, the company's growing debt will only make this situation worse.

One of these things is not like the others
One central issue that should worry Frontier investors is, the company is performing poorly relative to its peers when it comes to both residential and business revenue growth. In the current quarter, Frontier reported residential revenue was down about 5% and business revenue suffered an identical decline of 5%.

By comparison, Windstream and CenturyLink reported residential revenue declines of 3% and 1% respectively. An even bigger difference between the three came in the business revenue side of things, where Windstream and CenturyLink both reported a 1% increase in revenue.

Frontier simply can't afford to see a 5% annual decline in revenue from both residential and business customers and hope to turn this ship around.

A slow creep toward the inevitable
To be clear, Frontier's dividend isn't in trouble today, but if the company continues on its current path, the final result is clear. Look at how the company's core free cash flow (net income + depreciation-capex) payout ratio changes in the next year if the company doesn't make some major changes.


Net Income



Core FCF


Payout Ratio

*Q4 '13

$63 mil.

$280 mil.

$169 mil.

$174 mil.

$100 mil.


*Q1 '14

$61 mil.

$274 mil.

$169 mil.

$166 mil.

$100 mil.


*Q2 '14

$59.5 mil.

$269 mil.

$169 mil.

$160 mil.

$100 mil.


*Q3 '14

$58 mil.

$264 mil.

$169 mil.

$153 mil.

$100 mil.


(*10% annual net income decline-2% quarterly depreciation decline - stable capex of last 4 quarters-stable dividends)

Analysts expect a roughly 10% decline in EPS over the next few years. In addition, Frontier is seeing a 2% quarterly decline in its depreciation allowance. Even if we assume the company maintains its capital expenditures average over the last four quarters, the payout ratio rises every quarter.

Again, the dividend isn't in trouble today, but the above table suggests Frontier's dividend will get relatively less safe each quarter. If you want to monitor how the company is doing, consider adding FTR to your personalized Watchlist. You don't want to be caught unaware by a dividend cut that no one sees coming.

A tech stock that's really worth it
Opportunities to get wealthy from a single investment don't come around often, but they do exist, and our chief technology officer believes he's found one. In this free report, Jeremy Phillips shares the single company that he believes could transform not only your portfolio, but your entire life. To learn the identity of this stock for free and see why Jeremy is putting more than $100,000 of his own money into it, 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

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.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

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. The show is also heard weekly on dozens of 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. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers