Companies in the same industry don't always follow the same business model, and it's hard to find two more diametrically opposed ways of doing business than you'll see with Frontier Communications (FTR +0.00%) and Verizon Communications (VZ +0.29%). Verizon has spent tens of billions of dollars to create what it sees as the premier wireless network in the U.S., selling off its older assets in order to pursue its best growth opportunities. Frontier, on the other hand, has been a frequent purchaser of the assets Verizon seeks to sell, hoping to find ways to serve former Verizon customers better for their home and business connectivity needs.
With the rapid pace of change in telecom, investors have to be smart in comparing key players in the industry. With that in mind, below we'll take a closer look at Frontier and Verizon to see which company seems like the better buy right now.
Image source: Verizon.
Valuation and share performance
Neither Frontier nor Verizon has done all that well for shareholders recently, but Verizon has a clear edge. The telecom giant has limited its losses since March 2017 to just 3%, compared to an 83% drop for its smaller counterpart.
The problem with valuation-based comparisons with companies of such different sizes and in such different positions with respect to their business is that you can't count on being able to use simple traditional metrics. For instance, with earnings, Frontier has consistently lost money, and investors expect that trend to continue at least into the near future. Verizon, on the other hand, has solid earnings, and its valuation is on the cheap side compared to the broader market.
When you look at alternative valuation metrics like price to sales or price to book value, Frontier looks a lot cheaper than Verizon. Yet you have to be skeptical of whether book value truly reflects what Frontier's assets are worth. All in all, Verizon looks like it's in a more secure place from a valuation standpoint.
Dividends
It used to be that you could count on telecoms almost universally to provide extremely high dividends. That's still true for Verizon, which boasts a dividend yield of 4.9%. The company boasts a 13-year track record of giving investors annual dividend increases, and although those boosts have tended to be small -- for instance, a 2% rise in its most recent move last fall -- they've been reliable.
Frontier has gone from dividend hero to dividend zero in a short period of time. In early 2017, the company slashed its payout by more than 60%, citing the need to preserve capital for purposes like paying down debt and dealing with business investment needs. Yet that proved inadequate, and Frontier suspended its dividend entirely at the end of February 2018. For dividend investors, Verizon is now the only choice for income between these two telecoms.
Growth prospects and risk
Competition in telecom is fierce, and even the strongest of companies are having a difficult time charting a certain course toward the future. For Verizon, steady performance has been an achievement, with the company seeing gains in operating revenue and retail wireless connections in its most recent quarterly report. Verizon is seeing interest in its cutting-edge applications, including the high-grade Fios service and its business in the Internet of Things. Capital expenditures will pick up in the coming year as Verizon looks to work toward its 5G commercial and residential launch, and guidance for the coming year looks reliable if perhaps slightly uninspiring.
Frontier is dealing with an existential threat to its future. Acquisitions have been helpful in making the company bigger, but the $17 billion in debt that it has on its balance sheet leaves Frontier in a highly leveraged position. Higher interest rates are looming, and sluggish performance in its core business has some questioning whether Frontier will be able to maintain its debt as refinancing and restructuring it become more difficult. Total customer counts dropped 10% in the fourth quarter of 2017 compared to the prior-year quarter, and Frontier is losing many of the residential and business customers it paid so much to acquire from Verizon and other players in the industry. Improvements in cost management could help to keep operating earnings and cash flow solid, but Frontier is fighting against the clock as much as against fellow competitors in the industry.
Between these two stocks, Verizon looks like the better buy right now, as Frontier's risks seem to overshadow its potential reward. With a steady dividend, cheaper valuations by many metrics, and a clearer road ahead strategically, Verizon will appeal more to the majority of investors looking for telecom exposure.
