Once a virtually unknown company, Frontier Communications (FTR +0.00%) has earned the attention of investors because of its historically high dividend yields. Yet with a big plunge in its share price since early 2011, the stock serves as a painful example of how chasing yield can burn you.
Putting the past aside, though, the big question investors have to answer now is whether Frontier has what it takes to turn things around and start making money for investors. I address that and more in my premium report on Frontier Communications. Below is an excerpt, which describes the opportunity that the company has in competing against fellow rural telecoms Windstream (WIN +0.00%) and CenturyLink (CTL 0.54%).
The opportunity for Frontier
Frontier serves as a great reminder that promising companies often do rather dull things. For years, Frontier has brought landline telephone service to customers in rural areas around the nation, as well as offering cable television and broadband Internet.
That may not sound like a glamorous business, especially compared to larger telecom companies that have tapped into state-of-the-art wireless networks and concentrate on selling the latest smartphones and serving first-adopters at premium prices. What you have to keep in mind, though, is that in many rural areas, the primary provider has a huge advantage over any competitors -- if there even are any. That explains Frontier's historically high customer retention and low churn rates.
But two years ago, Frontier transformed its business forever. The company closed on a deal with Verizon (VZ 2.15%) in which Frontier paid $8.5 billion for a huge swath of rural Verizon customers across 14 states, giving Frontier access to 4.8 million local access accounts, 2.2 million long-distance customers, and a million high-speed Internet customers. The transaction tripled Frontier's size, but it also left Frontier with a lot more debt on its balance sheet.
After the Verizon transaction, Frontier's revenue immediately soared. But the company's net income never followed suit. Even worse, sales have slowly but surely eroded over the past eight quarters, while the huge increase in the company's share count due to the Verizon deal has left the company with greatly reduced earnings per share -- and has forced the company to cut its dividend not once but twice. That in turn has sent shares plunging.
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That was just the first part of The Motley Fool's premium research report on Frontier Communications. At this point, Frontier hasn't been able to capitalize on the opportunity that its Verizon purchase gave it, but it's still looking for ways to get the most from its newly expanded customer base by encouraging other sources of revenue.
