My first thought when I see a high yielding stock is, can the company afford the dividend? There are a few sectors of the market known for their high yields, such as telecommunications and utilities. In the local telecommunications space, companies like CenturyLink, Inc. (NYSE:CTL), Frontier Communications Corp (NASDAQ:FTR), and Windstream Corporation (NASDAQ:WIN) are all offering significant yields. However, looking at Frontier’s recent earnings report, I see multiple challenges that need to be addressed.
Landlines, Broadband, and Video Oh My!
It’s no surprise that home telephones (aka. landlines) are being cancelled in favor of cell phones. This happened in my own house about a year ago. With companies like Verizon Communications Inc. (NYSE: VZ), Sprint Nextel Corporation (NYSE: S), and AT&T Inc. (NYSE:T) offering plans with unlimited minutes, the home telephone is becoming less of a necessity.
The challenge each local telecom faces is, trying to sign up enough broadband and video customers to offset these landline losses. With the increase in video and music streaming, as well as cloud storage options, the need for broadband Internet is increasing. When it comes to offering video solutions, local telecoms are stealing business by taking advantage of customers frustration with their local cable company. In theory, if these local telecoms. can sign up enough broadband and video customers, they won’t have to worry as much about the decline in landline, at least that’s how it’s supposed to work.
Data, Data, Who Took The Data?
High-speed Internet is becoming almost as necessary as a landline once was. Many people who have high-speed connections can’t imagine trying to go back to life without this service. If you look at most of the telecom. industry, broadband net additions are an area of strength.
In the last few months, both CenturyLink, Inc. (NYSE:CTL) and Windstream added about 1% to their broadband subscriber base. AT&T Inc. (NYSE:T) on the other hand, reported a loss of 0.23% of its broadband connections during 2012. However, the company has a strong wireless business which added 3.59% more subscribers. Frontier’s recent quarter, shows a revenue decline of 1.82% in data and Internet services. As you can see, Frontier was one of the only companies among their peers to report such negative growth.
This Isn’t The Direction Cash Flow Is Supposed To Go
Another challenge facing Frontier is, their full year operating cash flow was down on a year-over-year basis. Specifically, the company saw a nearly 9% decline in operating cash flow during the last year. This wouldn’t be a huge deal, but the company’s forecast for 2013 says this is an ongoing issue.
Frontier suggested that for 2013 the company’s free cash flow will be between $850 million and $950 million. The problem is, for 2012 the company reported free cash flow of $975 million. This means not only did the company see an almost 9% drop in free cash flow in 2012, but in 2013 they are forecasting another drop of between 2.59% and 12.84%.