Despite the three-day rally in stocks, recessionary fears have many investors scrambling to find stable stocks that might still
turn a profit.
I’ve uncovered a select group of potentially “recession-proof” stocks that offer an attractive dividend – and have been doing so for years. These blue-chip companies are backed by solid charts and strong fundamentals.
Last week, I highlighted 100-year-old blue-chip utility Southern Co. (NYSE:SO). This week, I’d like to turn your attention
to one of the highest-yielding stocks in the S&P 500, Frontier Communications (NYSE:FTR).
The largest rural telecom provider in the U.S. (as measured by customers), Frontier offers an annual dividend of 75 cents — an outstanding forward annual yield of around 10.7%.
Frontier provides landline, high-speed Internet and digital TV services to customers across 27 U.S. states. Its services doubled in size in mid-2010 after it acquired millions in access lines from phone provider Verizon (NYSE:VZ).
From a technical outlook, the acquisition had an overall positive impact on the stock. Shares rose from a pre-acquisition low near $6.16, in early 2010, to a post-purchase high of $9.15 by early 2011.
Although the stock has been in a slump in recent months, it was able to bounce off a major support level, around $6.20. Since support — which often acts as a floor, holding a stock steady — is likely to prevent the stock from falling further, FTR may be near its low. As a result, now could be a potentially attractive entry point to take a position and ride the stock higher.
Investors should be aware, however, that if the $6.20 support level is definitively, the stock could quickly drop much further.
From a fundamental perspective, Frontier’s revenue and earnings appear solid, meaning the company’s dividend is stable.
Due to the Verizon acquisition, revenue in the first six months of 2011 exploded 157% to $2.7 billion, from $1.04 billion in the first half of 2010.
For the full 2011 year, the 17 analysts following the company expect revenue will expand 38.5% to $5.3 billion, compared to $3.8 billion last year.
While earnings fell markedly in the first half of 2011, there are three mains reasons for the drop. First, operating expenses soared, due to increased severance pay and early retirement costs brought on by the Verizon purchase. Second, interest expenses nearly doubled. Third, as a result of the acquisition, 679 million new shares were issued to Verizon, tripling Frontier’s number of shares outstanding to 679 million, and as a result substantially reducing Frontier’s earnings-per-share figure.
For these same reasons, analysts project full-year 2011 earnings will drop to 26 cents a share, from 48 cents a share a year earlier.
Nonetheless, the company’s dividend appears secure, due to its free cash flow balance. For the first half of 2011, Frontier’s free cash flow was $484.2 million and it paid out $373.2 million, resulting in a sustainable payout ratio of 77%.
Furthermore, Frontier’s Chairman and CEO, Maggie Wilderotter, has assured shareholders the company is committed to maintaining its dividend. Over the next two years, Frontier plans to add 575,000 customers to its current base of 1.7 million subscribers. This addition should increase cash flow, helping to further support the company’s dividend.
Because this rural telecom provider has such an attractive dividend, Frontier is a viable pick to ride out these volatile times.
At the time of writing, Deborah O’Malley did not hold a position in any of the stocks mentioned in this article.