Dividend investors have struggled with telecom company Frontier Communications (NASDAQ: FTR) in recent years. The once-rural telecom specialist has gone through an impressive growth spurt in recent years, having picked up plenty of assets from larger peers in the industry and seeking to make the most of newly inherited customers. Yet even though the stock has a reputation for having a high dividend yield, two payout cuts in 2010 and 2012 hurt its reputation. Now, can Frontier build momentum toward a higher payout? Let's look more closely at Frontier Communications to see whether investors should expect a dividend hike over the next year.
Dividend stats on Frontier Communications
Data source: Yahoo! Finance. Last change refers to ex-dividend date.
The love-hate relationship between dividend investors and Frontier Communications
At first glance, it's easy to see Frontier Communications as an attractive dividend stock. The company's yield of 9% puts it among the top tier of dividend stocks in the entire stock market, and last year's dividend increase marks what the company hopes will be an upward trend in its payout going forward.
Yet when you look back at Frontier's dividend history, you'll see a much less positive story. The company used to pay $0.25 per share on a quarterly basis, but Frontier made two separate reductions. First, the telecom made a 25% cut to $0.1875 per share as part of its deal to acquire certain assets from Verizon Communications(NYSE: VZ) covering 14 different states. In announcing the acquisition in 2009, the company issued a new dividend policy that it said would allow Frontier "to invest in the acquired markets, offer new products and services, and extend and increase broadband capability to those markets over the next few years." The cut took effect when the Verizon deal was completed in 2010.
Then, in 2012, Frontier again reduced its payout to $0.10 per share, with then-CEO Maggie Wilderotter arguing that the move "will enable Frontier to reduce debt, improve our leverage, have ample cash to invest in the network and other strategic initiatives, and to provide a more sustainable shareholder return through a lower dividend payout ratio." Wilderotter said that the decision was a difficult one, but that it was in the best interest of shareholders overall.
Investors got a little bit more back in 2015, when Frontier boosted its dividend by half a penny per share to $0.105 every quarter. Wilderotter said that the move came following Frontier's higher free cash flow, noting that "strong progress in our continuing business as well as an excellent start in Connecticut" following its acquisition of assets there from AT&T helped to set the stage for the increase.
Can Frontier dividends keep rising?
Frontier has recently reassured investors that it remains committed to its dividend policy, even though some investors seem to fear further dividend cuts. In particular, another big acquisition from Verizon will once again challenge Frontier to make the most of newly acquired customers, and the need for greater investments in the big markets of Florida, California, and Texas could put new demands on Frontier's cash flow going forward.
That said, current CEO Dan McCarthy has said time and time again how Frontier intends to keep things as they are. "We remain committed to our disciplined capital allocation strategy and our attractive, sustainable dividend that is supported by a sector-leading payout ratio." In particular, the way that Frontier calculates payout ratios, the dividend currently represents about half of free cash flow, and that seems to be in line with what the company wants and expects.
Frontier shareholders shouldn't necessarily expect a dividend increase in 2017, but a lot depends on how well the Verizon acquisition goes. If new customers start to bring in huge cash flow growth, then Frontier might well choose to share the rewards with shareholders through higher dividends. If the acquisition hits obstacles, however, then investors should batten down the hatches and just hope that Frontier can keep its payout flat in the future.
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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.