Utilizing our Dividend Safety scoring system, let’s see what red flags we need to look into further before deciding to invest in Frontier for its dividend.
The primary red flag Frontier has is a recent history of cutting its dividend. In the last five years Frontier has cut its quarterly dividend twice: once from $0.25 to $0.188 in 2010 and then to $0.10 in 2012. Another alarming trend is that the company’s profit margin has been shrinking over the past five years reaching a 10-year low in 2012. This trend likely comes from customers moving from higher margin traditional voice services to the more competitive but higher growing data services. On the positive side it does appear that the free cash flow payout ratio is at a very manageable level for the current dividend payment and the company has enough cash-on-hand to cover at least 18 months worth of dividend payments.
With Frontier’s rocky dividend history one would have a difficult time deeming its current dividend safe. But with the recent dividend cuts and current financials, the current quarterly dividend payment is quite manageable. Management has commented that they are committed to reducing leverage, cutting costs, and increasing data services growth. If management is successful then the current dividend represents a great bargain, but if the company runs into issues executing its plan and free cash flow is reduced, then the dividend will likely be sacrificed once again in order to preserve its financial stability.
Disclosure: The 4% Portfolio Retirement Service has made no recommendations on FTR.