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3 Reasons Frontier Communications Corporation Stock Could Rise

By Dan Caplinger – Sep 22, 2016 at 9:15AM

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Despite its challenges, Frontier has plenty of potential.

Volatile price action is one of the hallmarks of Frontier Communications (FTR) stock. With the company having made large acquisitions of assets from other players in the telecom industry, it has had to deal with the challenges of having paid massive amounts of cash in exchange for the opportunity to try to retain and expand customer relationships to incorporate a broader range of services. Frontier's stock price has essentially treaded water for years, but some believe that recent events could finally get the shares moving in the right direction. Let's take a closer look at some reasons why Frontier could see its stock rise in the near future.

Image source: Frontier Communications.

1. The longer Frontier keeps its dividend stable, the better the stock will perform.

Many investors like Frontier Communications because of the high dividend yield it pays. Currently, Frontier's payout amounts to a nearly 10% dividend yield, and the company has kept its dividend stable for more than four years now.

Skeptics note that Frontier has never followed traditional guidelines for setting its dividend payments, using free-cash-flow-based metrics that lead to massive payout ratios when you use GAAP earnings as the basis for comparing payouts. Moreover, Frontier's history of dividend cuts has justified investor skepticism, with the payout having gotten cut 60% in the span of a couple of years in the early 2010s.

Nevertheless, Frontier has expressed optimism that it will be able to keep its dividend at its current level for the foreseeable future. Indeed, the company even made a small boost to its payout in early 2015, and if things with its business go better than expected, then another minor increase could come at some point. Yet most dividend investors would be satisfied simply to see the current dividend remain in place, and the longer it does, the more likely it is that Frontier stock will gain ground.

2. The Verizon acquisition has huge potential.

The deal that Frontier made with Verizon Communications (VZ 0.26%) to spend $10.5 billion on wireline assets in California, Florida, and Texas was just the latest in a series of aggressive moves to grow. The purchase essentially made Frontier double in size, with millions of customers coming in with voice, broadband, and video service.

Most of the early attention on the deal has centered on the difficulties that Frontier has had with integrating its new customers. Yet despite the level of competition in the marketplace, most telecom customers are extremely frustrated with their existing carriers, and they know that the slim odds of finding a better fit don't make it worth the hassle of actually switching.

More importantly, Frontier has an opportunity to take customers that Verizon might have neglected and instead work harder to cross-sell new and expanded services. In particular, Frontier has plans to improve the quality of its broadband access and make it available to more of its customer base. If it can persuade many of its newly acquired former Verizon customers to adopt broadband for the first time or upgrade for faster speeds, then Frontier could end up with a big win that few investors are counting on seeing.

3. Low interest rates could last long enough to help Frontier beat its debt.

The biggest financial threat that Frontier faces is its debt. Even before completing the Verizon deal, Frontier spent roughly $1 billion per year on interest expense. Now, the company's most recent quarterly interest expense amounts to $386 million, and long-term debt amounted to almost $18 billion when you include the current portion of that indebtedness.

Frontier lacks an investment-grade bond rating, with its BB-minus rating from Standard & Poor's putting it squarely in high-yield territory. That makes it more expensive for Frontier to maintain its debt. For instance, given the massive size of the Verizon deal, Frontier was able to get financing late last year for as long as 10 years, at interest rates ranging from around 9% to 11%.

Believe it or not, low interest rates have made that burden much easier in recent years. Some fear that rising rates could put Frontier in a tough situation when it has to restructure its debt in the future. However, if rates stay low, Frontier will be better able to negotiate favorable rates and keep its high debt-maintenance costs under control.

Frontier stock hasn't performed very well lately, and the uncertainties surrounding its major acquisitions have some shareholders on edge. If these three factors go Frontier's way, however, the company has a good chance of seeing its stock recover from its recent doldrums.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Verizon Communications. 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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