Frontier Communications Corporation BFTR

Morningstar Rating

Stock Research and Analysis

by Michael Hodel, CFA

Frontier continues to push ahead with its plans to acquire a portion of Verizon's VZ fixed-line business, with a handful of state regulatory approvals rolling in. The Verizon operations continue to perform poorly, however, and the fight for regulatory Read more

Bulls Say

While Frontier will cut its dividend to $0.75 per share as part of the Verizon transaction, the stock still offers a very attractive--and much more sustainable--yield. The firm has also bought back nearly $750 million of its shares during the last four years.

Frontier's phone lines are in small markets and rural areas where competition is minimal and government subsidies pad margins. The Verizon properties are less rural on average but still tend to face much less competition than in urban markets.

More than 40% of Frontier's current residential phone customers subscribe to its high-speed Internet access service. Moving the Verizon territories closer to this level of penetration should enhance customer loyalty and revenue growth.

Frontier's management has proved adept at acquiring other rural phone companies in the past, wisely selecting targets, refusing to overpay, and integrating new properties quickly. The firm is prepared to take on the Verizon assets. Read more

Bears Say

Frontier is taking on a huge burden with the Verizon assets. Verizon has neglected these territories over the years--only 62% of customers can get high-speed Internet access--eroding customer loyalty. Revamping the business in the face of increasing competitive options for customers will be very difficult.

The fixed-line phone business is in a state of decline. Frontier has reduced customer losses recently, but at the expense of heavy promotional activity.

Given the dispersed nature of many of Frontier's territories, deploying the latest technologies may not be economical for several years, if at all. These areas could make prime targets for new wireless technologies.

As Frontier loses phone customers, it also loses the ability to earn very high-margin sources of revenue, such as access fees from long-distance carriers. Regulatory changes could lower access fees or subsidies paid to rural carriers, making it difficult for Frontier to maintain its generous margins. Read more

Strategy

Frontier's strategy has shifted slightly, though the firm will still seek to maximize cash flow and maintain a large, albeit smaller, dividend following the Verizon transaction. Management is now more Read more

Management

Leonard Tow took control of Frontier in 1989 and shaped it into a telecom firm. Tow resigned as CEO in 2004 and later surrendered the chairman title. The firm's board and management team have seen considerable turnover since. Maggie Wilderotter, who Read more

Profile

Frontier Communications serves about 2.2 million phone lines and 621,000 high-speed Internet access customers under the Frontier brand in 24 states. About 35% of customers Read more

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