With a huge dividend yield, Frontier Communications (OTC:FTR) looks extremely tempting as a dividend stock. But the shares have taken a big hit in recent years, leaving those who bought into the stock to get rich dividend payments with a better understanding of the risks involved with the company.
Investors need to keep particular watch at Frontier as it seeks to compete against fellow rural specialists Windstream (NASDAQ:WINMQ) and CenturyLink (NYSE:LUMN) to provide more relevant and higher-margin services. That's the thesis of my premium report on Frontier Communications, which includes the following excerpt, which names the four areas that Frontier investors should keep an eye on going forward.
1. Completion of the Verizon conversion.
Last April, Frontier completed the 21-month process of getting the operating, financial, and human resources systems it acquired from Verizon Communications (NYSE:VZ) integrated into its own systems. The move, which came nine months faster than Frontier had originally expected, should help old Verizon customers avoid the hassles of having their customer records scattered across two different systems. More importantly, better overall service will entice more customers to stick with Frontier rather than moving to competing services, and it should encourage some of those customers to add higher-margin services such as high-speed broadband as it becomes available.
2. Cash flow.
Many investors get confused by Frontier's high dividend payouts because they usually greatly exceed what the company earns, making the dividend appear unsustainable. But with huge amounts of non-cash depreciation and amortization write-offs, Frontier's net income doesn't reflect its actual cash flow at all. The better gauge to judge the company's ability to pay its dividends is to look at free cash flow, or net operating cash less capital expenditures. Despite rising cash flow figures, the big rise in the number of shares Frontier has outstanding is what's behind its recent decision to cut its dividends.
Frontier's future prospects depend on its ability to cross-sell high-margin service bundles to its landline customers. But by doing so, it will increasingly run into competition from cable companies that in many areas have already grabbed both video and broadband share. Especially in areas where it has taken new customers in the Verizon deal, you need to watch how successful Frontier is in converting existing accounts to add new services and then retaining those bundle customers. Excessive churn rates could spell problems for Frontier going forward.
4. Wireless bundling.
One of the biggest challenges that Frontier faces is that landline customers in rural areas have increasingly moved to wireless phone service as coverage areas become more extensive. Obviously, the best result for Frontier is for those switches never to happen. But acknowledging that isn't a very realistic expectation, Frontier recently made a three-year deal with AT&T (NYSE:T) to resell its wireless services, effectively allowing Frontier to keep customers in high-margin bundles rather than potentially losing their business to wireless carriers.
That was just a part of the Motley Fool's premium research report on Frontier Communications. Frontier rivals Windstream and CenturyLink face many of the same challenges going forward, and which company does the best job of handling tough conditions could end up being the best investment in the long run.