Shares of troubled telecom Frontier Communications Corp (NASDAQ:FTR) are continuing to crash today, with FTR stock off another 5% in the wake of a Wednesday downgrade.
For those of you keeping track, that’s a nearly 60% loss over the past year or so of trading, putting FTR stock around the $2 per share range. On the upside, that has driven Frontier’s yield up to more than 20%.
Best of luck if you go speculating on that.
Specifically, Goldman’s Brett Feldman warned that Frontier may opt to suspend its dividend after the first quarter of this year for liquidity purposes, as the company has significant debt maturities coming in 2020 through 2022. He continues:
“With the stock’s dividend yield nearly 2x peers’, we believe the market is pricing in a 50% cut. We do not view this as sufficient to drive long-term delevering and have removed the dividend from our model after 1Q17.”
In other words, Frontier might cut the dividend in half, which if it does, would still mean a dividend yield of about 10% for FTR stock at current prices. In fact, you can bet that yield will tick up even more, because a dividend cut will almost surely spark additional selling.
Feldman’s warning came amid a downgrade of other regionals, including Windstream Holdings, Inc. (NASDAQ:WIN) and Centurylink Inc (NYSE:CTL). The trio all received “sell” ratings. However, while all three have been suffering — WIN and CTL are down more than 20% in the past year — none are doing worse than Connecticut-based Frontier.
To its credit, Frontier has been growing its top line like a weed, from $4.76 billion in 2013 and $4.77 billion in 2014 to $5.6 billion in 2015 and $8.9 billion last year. However, income has been steadily dropping thanks to increased expenses — while the company was soundly profitable in 2013 and ’14, it flipped to a $319 million loss in 2015 that ballooned to nearly $600 million last year.
FTR’s cash position has been nearly halved since last year, and sits at just $522 million — a pittance compared to nearly $18 billion of total debt, which is more than double what it carried just three years ago.
While cash flow has been enough to cover the dividend, those debts are mounting and need addressed. Back in November, Thomas Byrne of Wealth Strategies & Management instead suggested the bonds for protection against a dividend cut:
“The bonds give you three-quarters of the yield of the equity, less duration risk and a higher place on the capital structure. If FTR runs into financial difficulties, down the road, dividends would be sacrificed to pay the debt.”
The S&P 500 has already dropped Frontier from its ranks. For now, FTR is nothing more than a speculative play — a gamble on whether the company can do enough financial shenanigans to pay nearly 20% in dividends without the stock plummeting even further.
As of this writing, Robert Martin did not hold a position in any of the aforementioned securities.