Among the highest yielding stocks in the market are companies in the rural telecom business, as they've aimed to make the most of a decaying business model and make every effort to shift their customers toward using higher-margin, more modern products and services. Yet despite its best efforts, Frontier Communications (NASDAQ:FTR) has cut its dividend twice in recent years, and it now pays just 40% of the dividend it gave investors five years ago. Nevertheless, even with the reduced payout, Frontier's 6% yield is appealing to many investors. Let's look more closely at two things every dividend investor should know about Frontier Communications right now.
1. Frontier Communications' deal with AT&T looks poised to go through.
One of the ways Frontier Communications has grown over the years is by acquiring the legacy landline business units of telecom rivals that are no longer interested in serving their customers. One of the biggest acquisitions Frontier ever made was buying landline and other assets from Verizon Communications (NYSE:VZ), as the deal greatly increased Frontier's customer base even as it freed Verizon to pursue higher-margin opportunities in more lucrative markets. Similarly, Frontier has been working with AT&T (NYSE:T) to buy out its Connecticut telecom assets.
For a while, it appeared that regulatory concerns might stymie the deal. For 10 months, officials at the Connecticut Public Utilities Regulatory Authority looked at the proposed agreement to evaluate whether it was in the best interest of the public. But just last week, the regulatory body finally approved Frontier's purchase of AT&T's wireline operations in the state. With that approval being the last regulatory hurdle for the deal, Frontier now expects it will close on the acquisition by the end of this week.
From a dividend standpoint, deals like the AT&T acquisition have both short-term and long-term effects. Frontier will pay AT&T about $2 billion, giving the larger wireless network giant some spending money to use toward capital expenditures to improve its service quality and coverage. For Frontier, though, having assets in Connecticut could give the company more cash flow as well as greater opportunities to get customers to add new services to their existing lineup. If that brings in more revenue, then it could provide Frontier with a long-term boost to make its dividend more sustainable.
2. Litigation against Frontier could bring negative publicity to the telecom company, even if direct damages aren't substantial.
Telecom companies don't always evoke positive reactions from their customers concerning their service. The quasi-monopolistic nature of telecom coverage, especially in rural areas, makes it difficult for competition to give customers a real choice, so many people end up stuck with any carrier that's locally available. Nevertheless, in some cases, overpromising and underdelivering can cause trouble.
Recently, West Virginia customers of Frontier Communications filed a class action lawsuit against the carrier, alleging that Frontier made untrue claims in its advertisements of its high-speed broadband service. Customers who subscribed to a service expecting to receive speeds of about 12 megabits per second instead allegedly came in at closer to 1 megabit per second. The lawsuit includes assertions that Frontier is deliberating reducing the speeds customers get even as it collects higher fees for premium service, in part because it allegedly doesn't have the infrastructure in place to provide high-speed service in rural areas of West Virginia.
For its part, Frontier representatives told a local newspaper that the company tested the plaintiffs' service and that standards met or exceeded "the 'up-to' broadband speeds to which they subscribed." Moreover, the customer agreement with Frontier says that customers aren't allowed to file class action lawsuits and must instead submit to binding arbitration. Yet even if the current legal issues don't result in any major damage award against the telecom company, Frontier will still have to deal with fallout from disgruntled customers who are unsatisfied with its service. In the long run, that might lead to greater numbers of customer defections.
Frontier Communications has done a reasonably good job of sustaining its dividend at its current lower levels. Now, the company must continue executing its strategy of making the most of its customer base if it wants to keep paying sizable dividends in the years to come.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.