One of the strongest indicators that a company could cut its dividend is that it’s done so in the past. Once a company has made that decision once, it’s easier to do it again. And again.
I suspect that’s going to be the case for Frontier Communications (Nasdaq: FTR).
The company provides telephone and broadband Internet services to more than 3 million residential customers and nearly 300,000 business clients.
I last covered Frontier two years ago and gave it a “C” rating. At that time, free cash flow comfortably covered the dividend, though I was concerned that it would decline, which it did. (More about that in a moment.)
My other real issue was that the company had a track record of cutting its dividend. Since it started paying a $0.25 per share quarterly dividend in 2004, the dividend has been reduced twice – first to $0.1875 per share in 2010 and then to $0.10 in 2012.
Last year, the company raised the dividend quarterly by half a cent…
But I suspect the dividend is headed back in the other direction.
At $0.105 per quarter (or $0.42 per year), the dividend Frontier currently pays offers a healthy 7.8% yield.
Now, back to that cash flow issue.
In 2013, free cash flow was $861 million while Frontier paid out $400 million in dividends for a payout ratio of just 46%. That’s enough of a cushion for it to pay and even raise the dividend.
In 2014, free cash flow declined to $582 million while the company paid out $401 million in dividends. The 69% payout ratio was still within my comfort zone.
However, 2015’s numbers were not good.
Free cash flow was just $438 million while the company paid dividends amounting to $576 million. So free cash flow did not cover the dividend. That’s a problem.
This year, Frontier is expected to generate enough free cash flow to pay the dividend, but the payout ratio is forecast to be above my comfort level of 75%.
