Will Frontier Communications Cut Its Dividend Yet Again?

Frontier Communications (FTR) will release its quarterly report on Tuesday, and shareholders remain nervous about the rural telecom's prospects for sustaining its dividend. Although its shares have performed well in recent months, Frontier earnings are expected to remain below its $0.10-per-share quarterly dividend. Even though rival Windstream (WINMQ) has managed to keep its dividend unchanged for years despite facing the same financial situation, Frontier's two previous dividend cuts make its investors more nervous about its payout.

Frontier has benefited from the fact that its rural customers haven't made the shift away from landlines and other antiquated telecom technology as quickly as their urban counterparts, helping to produce health cash flow from depreciating assets that hold net income down. Slowly but surely, though, even rural customers are getting service from wireless carriers, and that threat has led to two dividend cuts in the past three years for Frontier. Even now, though, Frontier still faces a heavy debt burden that could eventually jeopardize the dividend. Let's take an early look at what's been happening with Frontier Communications over the past quarter and what we're likely to see in its report.

Stats on Frontier Communications

Source: Yahoo! Finance.

Can Frontier earnings grow enough to sustain its payout?
In recent months, analysts have gotten a little bit more optimistic about Frontier's earnings prospects, boosting their full-year 2013 and 2014 estimates by a penny per share. The stock has also moved modestly higher, rising 3% since early August.

Frontier's second-quarter results gave investors some encouraging news. Adjusted earnings per share came in as expected, and Frontier added 29,500 net broadband customers and boosted its retention rates among business and residential customers. Sales fell but at a more gradual rate than some had expected, and Frontier kept its guidance for the full 2013 unchanged. By contrast, Windstream reported weaker results as it suffered losses in video and voice subscriber counts.

Yet both Frontier and Windstream still face the huge challenge of convincing their customers that they're the best provider for broadband and video services, even as competition from cable operators and wireless networks gets fiercer. Of particular concern is that many of Frontier's customers used to get their service from Verizon (VZ -0.95%), and so they don't have any particular brand-loyalty to Frontier. That's one reason why it's so important for Frontier to emphasize its retention efforts in order to avoid losing those former Verizon customers.

Frontier's cash flow remains a big concern. Unlike Windstream, Verizon, and fellow telecom CenturyLink (LUMN -6.59%), all of which have managed to grow core operating cash flow, Frontier has seen continued declines. Interest expense plays a major role in holding operating income down, and even with prevailing interest rates in the broader credit markets remaining at low levels, Frontier pays enough in interest to make sustaining its dividend difficult.

In the Frontier Communications earnings report, watch to see whether the company keeps hanging onto more of its waning customer base. If it can't stem the bleeding at some point, then Frontier will almost certainly have to reduce its dividend again in the future.

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