Founded in 1935, Frontier Communications Corp. (FTR) has expanded the offering of its communications services across 27 states in the U.S. With footprint in rural areas and small and medium sized towns and cities, the company provides phone, Internet access and other data transport services to 2.8 residential and roughly 270,000 business customers. It also offers television services, which comprise access to various digital channels and high definition TV programming.
With the acquisition of Verizon Communications Inc. (NYSE:VZ)’s local wire line operations in 14 states in 2010, the company tripled in size and became the largest rural-only service provider in the U.S. Currently, the firm is investing to expand Internet access availability and speeds in order to improve the performance of its acquisition. Further, it decided to get hold of AT&T Inc. (NYSE:T)’s operations in Connecticut in December 2013.
- Warning! GuruFocus has detected 6 Warning Signs with CMCSA. Click here to check it out.
- CMCSA 15-Year Financial Data
- The intrinsic value of CMCSA
- Peter Lynch Chart of CMCSA
A Better Outlook
Frontier is the leading phone company in most of the areas it serves, providing a broader reach than its competitors. Moreover, its superior scale and capabilities represent a competitive advantage in relation to business customers, which require a greater network and have less tolerance for disruption.
In addition, the firm has undertaken several initiatives in order to boost revenues. It recently introduced a stand-alone Internet service and it has been making consistent investments in its networks in order to improve data speeds. Further, it has launched aggressive promotions to compete with its cable rivals over market share.
Although these efforts have given positive results, reducing customer losses and growing revenue per customer, the firm still operates at a disadvantage in relation to wireless and cable companies . Firms such as Comcast Corporation (NASDAQ:CMCSA), Time Warner Cable Inc. (NYSE:TWC) and Charter Communications Inc. (NASDAQ:CHTR) have built superior platforms for Internet access, thus offering better data speeds as well as a full complement of services.
Furthermore, results from the Verizon acquisition have been quite poor over the last years since the areas it covers had been neglected by the former operator, causing market share to decline.
All in all, the growth achieved in customer Internet access and data service has translated into better revenue performance. However, this improvement is not strong enough to offset the persistent high-single-digit decline in phone revenue.
Dividend and the AT&T Acquisition
In 2012, Frontier reduced its dividend to 40 cents from 75 cents a share the prior year. While this is still an attractive yield, the decline has been a concern for Wall Street analysts.
Along these lines, last December the firm decided to acquire AT&T’s landline telephone, broadband and TV operations in Connecticut for $2 billion in cash. This purchase will help the firm to boost its adjusted cash flow, thereby enhancing its ability to pay its dividend.
As aforementioned, Frontier’s efforts to counter declines and resume growth have given modest results. And although the company has improved its margins, cutting costs via the reduction of its workforce by 7% in 2013, additional reductions will be difficult to accomplish.
Frontier’s stocks trade at 47.60 its trailing earnings, a premium compared to its rivals’ average of 16.70. Its earnings per share growth does not depict a better horizon, showcasing a negative 21.80% compared to the industry median of 1%. In line with these results, its return on equity delivered 2.78% compared to its competitors’ average of 12.49%.
Although investment guru David Dreman (Trades, Portfolio) recently incorporated the firm to its portfolio, the company doesn’t deliver signs of consistent growth potential. Consequently, I believe its dividend appeal will be difficult to support in time.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.