Frontier Communications Corp (FTR), Verizon Communications Inc. (VZ): Five Risks That This Telecom Needs to Worry About

Disappearing dividends

Frontier also reports:

“We cannot assure that we will be able to continue paying dividends.”

Frontier slashed its dividend for the past three years straight to shore up its balance sheet. This gives indication that Frontier’s frothy dividend yield of 10% may not last.

Goodwill is badwill for the investor

Frontier compiled a great deal of goodwill:

“We have a significant amount of goodwill and other intangible assets on our balance sheet. If our goodwill or other intangible assets become impaired, we may be required to record a non-cash charge to earnings and reduce our stockholders’ equity.”

The amount paid for a company in excess of its book value equates to goodwill, which gets recorded as an asset on the acquirer’s balance sheet. If the acquisition performs poorly then goodwill gets written down. In 2012, Frontier’s goodwill line item registered at $6.3 billion or roughly 154% of stockholder’s equity.

Given the declining state of Frontier’s landline assets, some of which originates from Verizon, the chance of a significant write-down in goodwill exists. If that happens then net income will nosedive and consequently leave a sour taste in the mouth of Mr. Market, who will bid Frontier’s shares south.

Conclusion

The declining nature of Frontier’s landline business will invariably lead to a continued decline in profitability, dividends, and overall financial state. The world continually adopts the wireless phone as the main form of communication. On the whole, your money will be served better elsewhere.

The article 5 Risks That This Telecom Needs to Worry About originally appeared on Fool.com and is written by William Bias.

William Bias has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. William is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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