Among dividend stocks, rural telecommunications companies have received a lot of attention from investors for years, with sky-high yields enticing those looking to boost their portfolio income. Along the way, shareholders in Frontier Communications (NASDAQ:FTR) and other rural telecoms have learned the hard way that high yields often come with higher risk, with Frontier slashing its dividend twice in recent years in response to deteriorating conditions in the industry. Yet now, things appear to be looking up for Frontier, and some investors are looking at the company once again as a viable prospect for solid dividends and growth. Here are three reasons why Frontier Communications deserves a new look from income-minded investors.
1. It's hard to find a better yield than Frontier's right now.
Frontier's current yield of almost 6% is quite a bit lower than it was in past years, when double-digit percentage dividend yields were much more common for the telecom. Yet Frontier still ranks in the top five in the S&P 500 -- and among those ahead of Frontier, most are hard-hit energy companies that could well cut their dividends in the near future if conditions in the energy markets continue to deteriorate.
Admittedly, rival Windstream Communications (NASDAQ:WIN) has done a better job of treating shareholders right than has Frontier, maintaining a 10%-plus yield and avoiding the dividend cuts that Frontier handed to its investors. But Frontier has arguably found a better balance between maximizing yield and not putting itself into an unsustainable position going forward, as it pays a much smaller portion of its overall cash flow in dividends than does Windstream. In many investors' minds, that makes Frontier a lower-risk play in the space, leaving it less dependent on elusive growth initiatives than Windstream.
2. Frontier is excited about its future.
Frontier Communications knows that in order to sustain its dividend, it must grow. Fortunately, its efforts on that front have been promising, and it looks as though they're starting to pay off.
Earlier this week, Frontier updated its full-year 2014 earnings guidance. With the completion of its acquisition of AT&T's (NYSE:T) landline operations in Connecticut, Frontier now believes it will have leveraged free cash flow ranging from $755 million to $780 million for the year, with capital expenditures amounting to $575 million to $600 million. Those numbers represent a roughly $30 million increase in cash flow, and capex figures appear to be coming in at the bottom end of Frontier's previously announced range.
The Connecticut acquisition will boost Frontier's customer counts substantially, bringing in 900,000 new voice lines, 415,000 Internet customers, and about 180,000 video subscribers. The $2 billion price tag will put some pressure on Frontier's finances for the near future, but if the company can make the most of those assets, they could help boost profits in the years to come.
3. Frontier has found ways to grow its more lucrative business segments.
The main issue most investors have with rural telecoms is that their legacy landline businesses are fading away. That makes it critical for Frontier to move those customers to longer-lasting and more lucrative services such as broadband Internet.
Frontier has done a good job of finding growth where it can. In its most recent quarterly report, the company cited substantial growth in its number of broadband customers , and it also boosted its business customer revenue from the previous quarter. By encouraging customers to take on more favorable product mixes, Frontier has kept overall sales levels up even as user counts in some divisions have fallen.
Frontier Communications is far from a risk-free stock, with a challenging business model that requires constant vigilance to ensure the company stays on track and manages its finances well. Nevertheless, Frontier's valuable growth prospects could help it sustain its dividend at current levels well into the future and satisfy those investors who rely on portfolio income for their living expenses.
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.