A 17% Yield on the Verge of an Upgrade?

Marc Lichtenfeld By Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Safety Net

Usually, a stock with a 17% yield has a lot of risk – especially its dividend.

There’s a reason it yields 17% while its peers yield less than a third of that amount.

Wall Street is telling you it expects the dividend to come way down… or that the company’s prospects are well below others in its industry.

That’s the case with Frontier Communications (Nasdaq: FTR).

Frontier provides telephone, internet and television services to mostly rural communities in 29 states.

It’s paid a $0.105 quarterly dividend since February 2015, which equals an enormous 17.2% annual yield.

One year ago, I reviewed Frontier and gave it an “F” rating for dividend safety.

My issue at that time was its history of dividend cuts, a high payout ratio and weak cash flow.


Those concerns are still valid, though there’s a chance for improvement.

Weak History

Frontier cut its dividend in 2010 and 2012. Any company that’s cut its dividend even once is more likely to cut it again.

Lowering a dividend is a big problem for SafetyNet Pro, as the system penalizes any company that reduces its dividend.

Frontier’s cash flow has steadily eroded since 2013. In fact, in 2016, the company’s $265 million in free cash flow didn’t come close to the $707 million that it paid out in dividends.

That’s not sustainable.

But 2017 is expected to be a much better year.

After acquiring Verizon’s landlines, Frontier is projected to save $1.25 billion in operating costs.

That’s a factor in analysts’ expectations of $1.1 billion in free cash flow in 2017.

If the company hits that $1.1 billion mark, it could actually afford the dividend it’s paying shareholders.

And a jump in cash flow that big would likely spark an upgrade from SafetyNet Pro.

But considering the company’s feeble track record, we definitely want to see it happen before feeling comfortable that the dividend is not in jeopardy.

Frontier Communications is based in Connecticut, but as far as SafetyNet Pro is concerned it is in Missouri. It needs to “show me” it can hit that big cash flow number.  Until then, investors should be ready for a cut at any time.

One thing to keep in mind: The company plans on asking shareholders to approve a reverse stock split. Management has not indicated whether it will make any changes to the dividend after the split,  but a reverse split is almost always a negative development.

Dividend Safety Rating: F

If you have a stock whose dividend safety you’d like me to analyze, leave the ticker symbol in the comments section.

Good investing,

Marc