Better Buy: Frontier Communications vs. Verizon
If you purchased shares of Verizon (NYSE: VZ) five years ago, then you've enjoyed modest capital appreciation and a respectable dividend that has grown over the years. While Verizon stock probably hasn't dramatically changed your fortunes, you've come away richer for the investment -- and you've probably been able to sleep easy at night holding the stock.
The same can't be said for Frontier Communications (NASDAQ: FTR), which holds itself as a vendor of communications services "over its fiber-optic and copper networks, including video, high-speed internet, advanced voice, and Frontier Secure digital protection solutions."
Over the past five years, Frontier stock has shed about 97% of its value, meaning a $10,000 investment in the shares has been reduced to about $300. To add insult to injury, the company also stopped paying a dividend altogether.
It's clear which of these stocks has been the better investment thus far, but a question for investors new to the scene is this: Which of these stocks is the better buy now?
A success or a risk?
Verizon isn't anything close to a turnaround story -- it's a hugely successful telecommunications player with strong positions in both wireless networks as well as in wireline.
After turning in decent results for 2018 -- revenue was up 1.4% to $108.6 billion, and non-GAAP earnings per share (EPS) hit $4.71, up from $3.74 in the prior year -- the company forecasts 2019 revenue to grow at a "low single-digit percentage" rate and for EPS, less the impact of a new accounting standard, to be "similar to 2018 adjusted EPS."
Verizon isn't promising investors significant growth (so don't expect the shares to generate large returns in a short period of time), but the business should continue to crank out massive amounts of cash to sustain its large dividend (the stock currently offers a dividend yield of 4.43%) for the foreseeable future.
Frontier Communications, on the other hand, doesn't offer that kind of safety at all. Last quarter, the company saw revenue drop nearly 5.6% year over year, and it reported a net loss on a non-GAAP basis (which excludes, among other things, a $400 million goodwill impairment) of $7 million, or $0.07 per share.
While that loss isn't great, what I think is more concerning is that Frontier's business is on the decline, and the company had about $1 billion worth of long-term debt coming due within the next year. The company also had $16.4 billion worth of total long-term debt.
Debt in itself isn't necessarily a bad thing as long as the company holding that debt generates tons of free cash flow. Verizon has about $106 billion in long-term debt. A lot of debt can be lethal when a company's ability to generate enough free cash flow to consistently service the debt is in question.
Frontier did say in its most recent earnings release that it expects its 2018 operating free cash flow to be "approximately $625 million," but that's cold comfort when the company's 2018 guidance calls for $1.5 billion worth of interest expense for the year.
The point is this: Frontier Communications' shaky business fundamentals coupled with its massive debt load make it an extremely risky stock to own.
Investor takeaway
If I had to choose between these two stocks for my portfolio, I'd pick Verizon in a heartbeat. The upside potential probably isn't as big for Verizon as it is for Frontier Communications if the stars align for the latter, but the downside risk for Verizon seems much more palatable than the risks Frontier Communications faces.
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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.