Why Frontier Communications’ Yield Has Reached 15%

In an effort to understand why investors are selling, driving the stock lower and the yield up; we’ll take a look at history starting with the Verizon properties acquisition. Frontier (FTR) announced a deal with Verizon Communications (VZ) in May 2009. When Frontier announced the acquisition in May 2009, expectations were based on the following pro forma numbers:

2008   Statistics
Sub-Total Synergies Total
Revenue $2,237 $4,287 $6,524 $6,524
EBITDA 1,214 1,918 3,132 $500 3,632
% EBITDA Margin 54.30% 44.70% 48.00% 55.70%
Interest Expense (363) (290) (653) 0 (653)
Cash Taxes (79) (285) (364) (190) (554)
Capital Expenditures (288) (413) (701) 0 (701)
Other 9 0 9 0 9
Free Cash Flow $493 $930 $1,423 $310 $1,733
FCF/Share $1.58 $1.37 $1.44 $1.75
Net Debt/EBITDA 3.8x 1.7x 2.6x 2.2x
Dividends ($0.75/share) $742 $742
Dividend Payout Ratio 52% 43%

The important numbers are FCF of 1.7B and a FCF payout ratio of 43%. The FCF payout ratio provided enough cushion to safeguard the dividend, handle unforeseen pension funding issues and maintain the leverage ratio (Net Debt to EBITDA ratio).

The deal was completed in July 2010. Once integration was underway FTR issued 2011 FCF guidance on February 23, 2011 in a range of $1.15-1.2B; a payout ratio approximately 64%. The leverage ratio rose above their target of 2.5 to 3.1. Still there was plenty of room for the $750m yearly dividend and items mentioned above.
….Click Here to Read the Full Article at SA…

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