The end to one of telco's chunkiest yields and a rough quarterly report were enough to send shares of Frontier Communications (FTR) sharply lower last week. Frontier stock declined 23.1% for the week, with a few analysts hosing down their near-term prospects following the unflattering financials.
Revenue declined 8% to $2.2 billion at Frontier for the fourth quarter. It experienced sequential and year-over-year slides in its residential and commercial businesses. Frontier also posted a hefty deficit, but that's not a shock for a company that has now served up deficits for 12 consecutive quarters. Frontier isn't connecting with customers, profitability, or investors these days.
Image source: Frontier Communications.
The last cut is the deepest
Rough financial updates have been the norm at Frontier Communications for the past few years, but income investors had the comfort of knowing that their patience was being rewarded with big dividend checks every three months. Frontier's yield stood at a jaw-dropping 36% before last week's move to suspend the payouts.
The dividend wasn't sustainable, but in the past the solution was to merely whittle down the disbursements. Frontier had slashed its payout rate three other times in the past, but this time it decided to eliminate the income. There's no timeline for when distributions can resume, but with Frontier talking up how the end of dividends will allow it to earmark the $250 million it will save there for debt reduction, it's fair to say that its yield will be a nice round goose egg for a long time.
The suspension took Wall Street by surprise. Morgan Stanley analyst Simon Flannery was expecting another dividend cut this year, but not its actual elimination. He feels that the end of the payouts overshadows a report that featured a narrower-than-expected adjusted loss and reasonable guidance for the year ahead.
Jefferies analyst Scott Goldman was less enthusiastic, downgrading the stock. Without Frontier paying a dividend, he doesn't see a clear near-term catalyst to own the stock. He's slashing his price target from $25 to $8.
Frontier is in a race against time. Its business is dwindling, and the $1.6 billion in annualized cost synergies that it's hoping to achieve may not matter much if business is still going the wrong way. The suspension of a dividend isn't necessarily fatal for a company, but for Frontier it was apparently the only reason that many investors were still clinging on to the fading company. It's going to be tough to bounce back until Frontier finds its way back to profitability or bottoms out in terms of its shrinking top line.
