Some dividend investors don’t realize that there is more to buying and owning a stock than the yield itself. Frontier Communications (FTR) and CenturyLink (CTL) both have an 7%-plus yield, ranking both among the better yields in the entire telecommunications sector. However, one is superior over the other.
FTR and CTL are similar companies: Both sell landline phone service, broadband Internet and TV services.
However, the two companies are going in completely different directions, including their balance sheets.
The Difference Between FTR and CTL
With Frontier’s $10.5 billion acquisition of Verizon’s (VZ) wireline assets across three states (California, Florida and Texas) it significantly increased its Fios fiber service base. While broadband is a growth industry, it is also highly competitive, and FTR has shown no desire to increase download speeds past 40 megabytes per second.
That’s not good given that so many competitors are upping speeds to one gigabit per second. Furthermore, landline phone use is a diminishing business with mobile phones becoming primary communication devices for many U.S. households.
Which is why CTL’s landline phone business has seen declines for the last five years; but those declines are slowing and CTL’s broadband and Prism TV businesses remain highly profitable segments.
Therefore, FTR and CTL are going in two different directions strategically.
Ultimately, the direction of FTR and CTL is something that must be considered, because if FTR continues to lose subscribers long-term its stock price will only fall lower. FTR’s huge bet on Verizon’s assets cost the company, too.
FTR raised $2.75 billion during its last quarter and finished the period with $9.5 billion in total debt. However, that debt is going to rise fast after FTR priced the second-largest junk bond offering of the year last month at $6.6 billion.
So even if FTR’s annual free cash flow rises to $800 million following the integration of VZ’s old assets, it still has a heavy debt load to pay off. Not to mention, that 8% dividend that FTR pays, costs the company over $500 million, thereby leaving just $300 million of annual FCF to pay off $16 billion in debt.
Bottom Line on FTR and CTL
If FCF remains unchanged long-term, FTR could get its debt paid off in 50 years, which isn’t good seeing as how its latest junk bonds mature in ten years and much of its existing debt well before that.
In regards to CTL, its debt of $20 billion is no joke either. However, neither is its $2.2 billion in free cash flow. After paying dividends, CTL still has $1 billion left over annually, making its debt quite a bit more manageable than FTR.
Not to mention, CTL has a more favorable mix of businesses outside of wireline phones, which is a good thing.
Last but not least, CTL’s stock is much cheaper. CTL stock trades at less than seven times FCF whereas FTR stock trades at a 13 times multiple to FCF.
When you consider debt and business mix, CTL stock is far superior to FTR stock, despite both having an identical dividend yield.
As of this writing, Brian Nichols was long CTL.
