Dividend investors have flocked to telecom stocks for decades, with the reliable income these companies generate generally producing substantial payouts for loyal shareholders. Frontier Communications (NASDAQ:FTR) counts itself among the top-yielding dividend stocks in the market, but until last week many investors worried about its capacity to sustain that payout. Frontier's history over the past several years includes two major dividend cuts that together lopped nealy 60% off its previous quarterly payout. Moreover, with regional telecom alternatives Windstream (NASDAQ:WIN) and CenturyLink (NYSE:CTL) also available as attractive dividend plays, investors need to understand what sets Frontier apart. Let's look closely at two things every dividend investor should know about Frontier Communications right now.
1. Frontier just boosted its dividend.
The biggest obstacle that many investors have toward investing in Frontier is that the telecom slashed its dividend payout twice in recent years. Its 25% cut in 2010 was bad enough, but when the company followed that up with a 47% reduction that dropped its quarterly payout to $0.10 per share from $0.25 at its 2010 high, it was hard for the typical dividend investors to have much faith in Frontier's future.
Last week, though, Frontier Communications finally reversed course by raising its planned dividends in 2015. Admittedly, its 5% hike will only bring its quarterly payout up to $0.105 per share. Still, even a token increase indicates Frontier does not expect any adverse conditions in the immediate future, as having to undo such a small increase with a future cut would be even more detrimental to investor confidence.
Frontier noted the importance of the move as a sign of its improving financial health. As CEO Maggie Wilderotter said Frontier's press release announcing the dividend increase, "Today's announcement reflects the Board's confidence in Frontier's business and financial strength and our solid execution performance in integrating the Connecticut acquisition." Although the company hedged its bets by noting the board must declare those dividends quarter by quarter, Frontier nevertheless appears to be on track to give shareholders greater rewards by March.
2. Frontier needs to balance its growth to sustain and increase its dividends over the long run.
Frontier has traditionally looked at major acquisitions to drive its business. Between its huge deal with Verizon in 2010 or the just-completed purchase of AT&T's (NYSE:T) Connecticut assets, Frontier has always looked for new ways to pick up customers from competitors that are seeking to divest themselves of their legacy landline customers in search of faster-growing market niches.
Buyouts can be an efficient way for Frontier to generate leads for new services. In many cases, customers aren't happy with their existing providers, and a forced switch can give Frontier a chance to shine if it can eclipse its competitors' customer-service levels.
Nevertheless, the important thing is what Frontier does with those customers once they come in through the door. In particular, encouraging broadband Internet access has been a key component of Frontier's strategy -- in its most recent quarter, the company added almost 22,000 more customers to its broadband ranks. Frontier also counts on higher-margin services such as broadband to boost its overall revenue metrics, with monthly residential revenue climbing above the $60 mark in the third quarter in part because of heightened demand for faster Internet service at both the residential and the business-enterprise level.
Ideally, Frontier should see customer growth at least in its stronger business lines without having to resort to future acquisitions. That does not mean Frontier should not capitalize if other opportunities to acquire valuable assets come up, but the company also needs to keep working its existing customer base toward getting the optimal mix of services to satisfy both their wishes for high-quality service and Frontier's desire for growing profits.
Frontier Communications still has plenty of challenges to overcome in order to rebuild its reputation as a strong dividend stock. For now, though, the company appears to be moving in the right direction. If it can sustain its recent positive results, then dividend investors could finally regain confidence in Frontier for the long haul.
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.