Frontier Communications Corp (FTR): How To Play The Dividend Cut Fear

Fear is high that a Frontier Communications Corp (NASDAQ:FTR) dividend cut is coming. It’s price is down, it’s yield (12.4%) seems unsustainably high, and short-interest is among the highest in the S&P 500. However, to a large extent, Frontier does have the ability to control its cash flows and sustain its dividend in the near- and mid-term.

The real challenge is that Frontier’s business exists in an anemically eroding marketplace. And if you are attracted to Frontier because of its big dividend yield, then you may want to consider the bonds instead. Many of Frontier’s high-yield bonds offer big interest payments, and they’re far safer than the stock (plus the bonds might get a nice price bump if Frontier’s dividend actually does get cut).

Frontier Faces Challenges

Frontier faces big challenges. For starters, the company provides voice, video and data services to customers dispersed across the US, often in smaller rural markets where the big boys (Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T)) are generally not interested.

The company’s financial wherewithal is being stretched increasingly thin considering the high costs of maintaining its dispersed and neglected networks, its balance sheet debt obligations, and its equity investor’s demands for dividends.

 

 

Also, potential increased competition from wireless service providers is threatening. And as further evidence of the challenges facing Frontier, short-interest has recently exceeded 19%, making it one of the most “bet against” stocks in the S&P 500.

 

 

Further still, the following chart shows the company’s free cash flows (the money from operations left over after capital expenditures) has recently been negative.

 

And considering all of these challenges, many investors are left wondering if the big dividend is safe, or if it is heading for a big dividend cut.

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