Frontier (FTR) announced a reduction in the yearly dividend from $0.75 to $0.40 in February. The 47% dividend cut provides an additional $348 million a year. The dividend cut, while painful to many, was necessary. The reduction added flexibility to:
• Meet pension obligations
• Reduce and/or refinance debt
• Lower leverage
• Lower payout ratio
The stock has taken a beating over the last year as investors realized a dividend reduction was only a matter of time. The question now becomes is FTR a good investment going forward.
Management projections for FCF have not inspired confidence. When Frontier announced the acquisition of the Verizon properties named SpinCo in May 2009, FCF on a pro forma basis was $1.73 billion, including expected synergies at the time. The deal was completed in July 2010. Once integration was under way FTR issued 2011 FCF guidance on February 23, 2011, in a range of $1.15-1.2B. At the Goldman Sachs conference on September 20, 2011, FTR lowered the 2011 FCF projection from a midpoint of $1.175 billion to $1.1 billion. Now the midpoint for 2012 is $950 million. (Note: Management projections are non-GAAP; calculation details are found here) The problem is guidance continues to trend in the wrong direction.
We’ll examine trends based on management’s financial track record using GAAP results to highlight longer term trends. The raw data used in this article can be found here.
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