When investing for income, a high dividend yield may look tempting. However, the dividend yield may reside in the stratosphere for a reason. The stock price could have taken a beating due to fundamental degradation. A dividend cut may simply lag due to the fact that the board doesn’t want to send such an obvious negative signal to markets highlighting its troubles.
The double digit dividend yield
Telecommunications company Frontier Communications Corp (NASDAQ:FTR) currently pays $0.40 per share per year. Based on its roughly $4 per share price, as of this writing, this equates to a 10% dividend yield. You may think that is great. Where else can you get a 10% dividend return?
However, looking at Frontier Communications Corp (NASDAQ:FTR)’s fundamentals will make you want to think twice about making the leap into this company’s stock. First, it should be noted that Frontier Communications Corp (NASDAQ:FTR)’s dividend shrank (emphasis mine) from $1.00 per share in 2009 to its current $0.40 per share. In 2011 and 2012 Frontier Communications Corp (NASDAQ:FTR) paid out 100% and 53%, respectively, of its free cash flow in dividends.
This correlates to a steady decline in Frontier Communications Corp (NASDAQ:FTR)’s profitability. Frontier Communications Corp (NASDAQ:FTR)’s income from continuing operations shrunk from $156 million in 2010 to roughly $153 million in 2012, translating into a decline in continuing operating margins from 4% in 2010 to 3% in 2012.
In addition, Frontier sits on a terrible balance sheet. While Frontier possesses cash equating to 32% of its equity base, thanks to a debt offering, its long-term debt to equity ratio stands at an astounding 203% of stockholder’s equity. Its operating income can barely meet its interest obligations, exceeding it by only 1.4 times as of the end of 2012.
Industry trends don’t favor Frontier. The company’s main focus lies in providing rural customers with landline telephones and broadband Internet at a time when the marketplace increasingly favors wireless communications. In 2012, Frontier experienced a decline in its residential and commercial customer base to the tune of 7% and 8% respectively. Frontier’s broadband segment showed a little more sunshine with a 1% gain in its customer base.
Frontier’s 10% dividend, as well as the company itself, may not last long given the continuing market shift away from landlines. This company may well cut this dividend further. Better fish lie in the sea.
AT&T Inc. (NYSE:T), a telecommunications company, whose name goes back over 100 years, currently sports a dividend yield of 5%. AT&T Inc. (NYSE:T), thanks to its participation in the wireless industry, stands on more solid footing than Frontier.