Shares of Frontier Communications (FTR +0.00%) tumbled 15.4% last week. The regional telco came under fire after Goldman Sachs analyst Brett Feldman downgraded the stock from "neutral" to "sell." He also shaved his price target in half, going from $3 to $1.50.
Feldman thinks Frontier's decaying fundamentals could force it to suspend its dividend after this quarter's payout. Frontier's quarterly distributions are a pretty big deal. The $0.105 quarterly rate translates into a current yield of 20.1%. Take away the dividend, and income-seeking speculators will clear out in a hurry.
Feldman is also taking a cautious tone with Frontier's peers. He kept his "sell" rating on CenturyLink (CTL +0.70%), lowering that stock's price target from $21 to $19. Feldman is also reinstating his "sell" rating on Windstream (WIN +0.00%). Feldman now has bearish calls on CenturyLink, Windstream, and Frontier, but downgrading Frontier, slashing his price target on the stock in half, and warning about the end of its payouts was enough to make it the biggest loser of the three.
Image source: Frontier Communications.
Trying to make a connection
Everyone knows Frontier Communications is fighting a losing battle. It's trying to keep wireline customers from getting rid of their landlines now that they're paying for smartphones. Frontier is also dealing with the same cord-cutters that larger telecommunications providers are coping with, but like Windstream and CenturyLink without the same resources.
Revenue posted a 71% year-over-year surge to $2.41 billion in its latest quarter, but growth was entirely the handiwork of a $10.54 billion deal for Verizon's wireline operations in California, Texas, and Florida that closed during the second quarter of last year. Sequential and organic year-over-year growth is declining.
Frontier Communications went from servicing 5.04 million residential customers when the fourth quarter began to 4.89 million three months later. The average monthly revenue per customer is also declining. Losses are mounting. Frontier has cranked out eight consecutive quarterly deficits, and that's the kind of performance that leads the market to wonder if a 20% yield is sustainable.
Goldman's analyst isn't the only one to publicly question Frontier's ability to keep printing fat dividend checks. J.P. Morgan analyst Philip Cusick downgraded the stock after its disappointing fourth quarter, questioning the sustainability of the bountiful distributions.
Frontier isn't standing still, and we're not just talking about last year's massive wireline acquisition. It's hoping to achieve $1.6 billion in annualized cost synergies by the middle of next year. Frontier may be in a funk of red ink, but it's still generating gobs of adjusted free cash flow, targeting between $800 million and $1 billion this year. It remains to be seen if Frontier will have to reduce its dividend or eliminate it entirely, but speculators hopping on the stock for its substantial yield may want to check that buy thesis at the door.
