Shares of Frontier Communications
How it got here
Dividend investors seeking a high yield and steady cash flow probably are no stranger to Frontier Communications. The company has regularly boasted its large dividend for years but has struggled ever since it purchased landline assets from Verizon
In Frontier's latest quarter, released yesterday morning, it highlighted a $0.05 quarterly profit amid a 6% decline in revenue. More worrisome was that it lost about 10% of its residential and business landline customers compared to the year-ago period. Although this loss rate is slowing and cost savings have improved, it's nonetheless a continuation of Frontier's core operations weakening.
How it stacks up
Let's see how Frontier Communications stacks up next to its peers.
There's a serious bifurcation of performance once you get beyond the big two telecom companies as seen here.
|
Company |
Price/Book |
Price/Cash Flow |
Forward P/E |
Dividend Yield |
|---|---|---|---|---|
| Frontier Communications | 0.8 | 2.1 | 14.4 | 10.3% |
| AT&T | 1.9 | 5.7 | 12.9 | 5.4% |
| Verizon | 3.2 | 3.8 | 14.6 | 5% |
| Sprint Nextel | 0.7 | 2.0 | N/M | 0% |
Sources: Morningstar and Yahoo! Finance. Yields are projected. N/M = not meaningful; future earnings are expected to be negative.
Outside of Sprint Nextel, which has produced five straight years of losses and suspended its dividend, the other three telecom providers offer their own type of value. Verizon is notably pricier than AT&T on a book and P/E basis, but it also has a marginally faster growth rate. AT&T, on the other hand, offers investors a slightly better return on investment with regard to its dividend. Frontier, however, may have the entire sector trumped. It's trading below book value and boasts a dividend yield that's basically double that of AT&T and Verizon. But can you trust its cash flow given its continued subscriber losses?
What's next
Now for the real question: What's next for Frontier Communications? The answer is going to depend on whether the company can stop its customer attrition and if it can also fend off the big mobile networks and broadband competition from full-service network providers like Comcast
Our very own CAPS community gives the company a three-star rating (out of five), with 90.4% of members expecting it to outperform. I'm in the minority here, as I've made a CAPScall of underperform on Frontier and am currently up 43 points on that call. But all good things must come to an end, and I'm ready to flip that call from an underperform to an outperform. Here's why...
Frontier's valuation finally makes sense. Yeah, it's that simple! Although subscriptions have been falling, Frontier can rely on the fact that rural customers will still need its landline services, so there is a floor to its customer attrition. Also, Frontier's business has suffered as it has attempted to cut costs by combining its network with that of Verizon's assets. With that transition more or less complete, it's ready to focus on growth again. Although I'm not sold that it won't cut its dividend again, I still feel confident that its dividend will remain higher than its peers. CAPScall of outperform, here I come!
That's not to say it will be easy; the proliferation of mobile communications has without a doubt impaired the traditional cash cow that is landline telephony for the telecom giants. If you're not sold on my bull case for Frontier and would rather go the mobile route, our analysts at The Motley Fool have discovered three companies set to take advantage of this next technological revolution. Click here and you'll get free access to our latest special report.
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