In the following video, senior technology analyst Eric Bleeker looks at the world of big dividend-paying telecoms and whether Frontier (NASDAQ:FTR) might be susceptible to a dividend cut similar to what peer CenturyLink (NYSE:CTL) just experienced.
As Eric notes, the biggest "advantage" for Frontier's dividend stability is that they've already gone through the painful process of cutting their dividend. In the first quarter of 2012, the company's quarterly dividend was cut from $0.19 to $0.10. Eric also notes that part of why CenturyLink moved to cut its dividend was its investment in growth opportunities such as Savvis, a big player in the growing managed hosting and colocation space. For better or worse, Frontier doesn't have the same level of investment in this growth space that requires additional capital investment.
However, Eric also notes that while CenturyLink cut its dividend to get ahead of changing taxes, that same situation is playing out with Frontier. The company is moving from $4.7 million in cash taxes across 2012 to $80 million in just the first half of 2014. Paying a significantly increased level of cash taxes will only put more pressure on cash needs.
Finally, ratings agencies and the threat of credit downgrades played a part in CenturyLink's decision to cut its dividend. As Eric discusses, having ratings agencies take a more critical look at debt loads is bad news across the industry, as it raises funding costs and increases the difficulty of obtaining new debt.
Investors in the space are clearly laser-focused on yields as the determinant of investing in companies. Just look at CenturyLink's post-dividend-cut plunge or Frontier's own struggles around the time it had to finally trim its dividend. That means that as an investor, knowing all the factors around dividend stability is your top priority. To see Eric's full thoughts, watch the video.
Eric Bleeker, CFA, and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.