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The Biggest Risk Facing Frontier Communications

By Daniel B. Kline - Apr 1, 2017 at 8:17AM

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The company has to decide how to handle what could be a difficult situation.

Frontier (FTR) has struggled mightily in its attempts to become a bigger player in the cable and internet space. But even as it has bled some of the subscribers it paid Verizon (VZ -0.37%) $10.54 billion for, it has had one major thing going for it -- its dividend.

Now, as the company considers a reverse split to keep its stock above NASDAQ's $1 per share threshold, the value of that dividend, and whether it will continue to exist at all has become highly questionable. Frontier has already declared it will pay a dividend of $0.105 per common share in Q1 payable on March 31 to people who owned shares at the close of business on March 15. That's good short-term news for embattled investors, and in-line with what it has paid for the past two years, but the long-term prospects look bleak.

FTR Chart

Image source: YCharts.

What is Frontier doing?

The company has seen its stock price steadily fall as it has struggled to hold onto the 3.3 million voice connections, 2.1 million broadband customers, and 1.2 million FiOS video subscribers in California, Texas, and Florida (CTF) it purchased from Verizon. Frontier's losses in Q2, the first quarter after the deal closed, were expected, but the drop in Q3 was harder to explain. When the company lost another 144,000 residential subscribers and 14,000 more business customers in Q4, questions as to whether the company could turn things around became legitimate.

As you can see on the chart above, the company's stock price has been falling fairly steadily all year. Frontier's failure to at least stabilize its subscriber loss in Q4, after suggesting it would happen during the Q2 and Q3 earnings calls, sent its stock price plummeting, something the company likely expected as it floated the idea of a reverse split in its Q4 earnings release:

Frontier also announced that its Board of Directors has approved and will place before Frontier's stockholders at the May 2017 Annual Meeting a charter amendment for a reverse stock split of Frontier Communications common stock. The charter amendment will provide for a reverse stock split ratio between 1-for-10 and 1-for-25, with the Board designating the final ratio within 90 days after the charter amendment is approved by stockholders. 

It's easy to see why Frontier pays a dividend. The payments keep shareholders on board while the company tries to transform itself. The problem is that Frontier lost $80 million in Q4 and $373 million for the year, before paying the dividend. After the payments are factored in the full-year loss jumps to $587 million.

A remote control points at a TV.

Frontier has been losing video subscribers. Image source: Getty Images.

What will Frontier do?

The company, it's important to note, has not suggested it will eliminate its dividend. In fact, CEO Daniel McCarthy implied that Frontier planned to keep it during the Q4 earnings call, which was transcribed by Seeking Alpha (registration required), saying that the board had considered the issue two weeks before the call.

"They obviously look at the allocation of capital and resources for us," he said. "They reviewed the complete plan that we presented on 2017, as well as the cash flows and all the initiatives that we're undertaking right now and they were comfortable declaring the dividend. So there has been no change in our policy on that perspective and they will just continue to evaluate that going forward."

What happens next?

The problem is that continuing to borrow money in order to fund a dividend has its obvious drawbacks. In the long-term it's not sustainable, but if the company eliminates the dividend after its reverse split, it runs the risk of seeing its newly propped-up stock sink further. That leaves it with three options:

  1. The company keeps its dividend the same by raising it on a per share basis by the same ratio it reverse split at.
  2. It keeps the dividend where it is, meaning shareholders, who will now own less shares, will receive less of a payout.
  3. Frontier lowers or eliminates the dividend.

Frontier has said it plans to go forward as it has, but has left itself wiggle room to make a change. McCarthy's statement was qualified by the words "right now" and it's very likely that if results -- specifically subscriber counts -- do not turn around in Q1, then the dividend will be very much in jeopardy. Were that to happen, it would make an already struggling stock even less attractive, and perhaps force the company to consider a sale or pursue other strategic options.

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