Frontier’s (FTR) Above 11% Payout Looks Safe Amidst Uncertainty

Frontier Communications (NYSE:FTR) stock price was under significant pressure over the last couple of years, amid unstable revenue growth and changing business dynamics. FTR’s share price declined nearly 22% in the last twelve months, extending a two-year decline to 43%. Amid falling revenues and fumbling earnings, Frontier sustained its dividends, increasing its dividend yield above 11%.

Frontier currently offers a quarterly dividend of $0.105 per share, yielding 11.41%. The company’s dividends look risky, considering its losses in the last couple of quarters and limited growth opportunities. In the latest quarter, the company generated a loss of $80 million and its earnings declined almost 8% in the last three years.

Following big losses, FTR’s management took several key initiatives to return the business back to profitability. While it’s too early to predict the results of the recent moves, including structural changes and a shift in revenue generation, the company appears in a position to sustain its dividend growth, thanks to strong cash generation potential.

Dan McCarthy, President and CEO, stated, “I am pleased that we achieved third quarter adjusted EBITDA of $1 billion. We are reaffirming our adjusted EBITDA guidance for the 4th quarter and outlook for 2017. We are on course to improve our revenue performance, principally by returning to normal customer trends in the CTF market over the coming quarters.”

Frontier also announced a new business structure to strengthen its focus towards core businesses. The company established its new business model based on a customer-focused organizational structure and the creation of Commercial and Consumer business units.

FTR’s internal cash generation continues to cover its capital requirements and dividend payments. After making capital investments, the company seeks to generate free cash flow of $1B for the full year, when its dividend payments are expected around $500 million. Therefore, despite earnings volatility, the company’s dividends are safe. In addition, Frontier’s annualized cost synergies of $1.4 billion will also provide significant support to its cash generation.

The author has no positions in the above mentioned companies.

Alexander is an analyst for who specializes in index and commodity trading. His outlook is usually near-term to medium-term. He has over 10 years of experience in the financial industry and began his career at the dealing desk. Alexander holds a Bachelor’s degree in Economics from University of Delaware.