Frontier Communications beat both revenue and earnings estimates but the question on most investors mind is the high dividend yield safe or a red flag? The stock closed at $3.92 and at the time of this writing yielding 10.8%. The high yield represents the market’s fear the dividend may not be sustainable. To answer the above question we need to take a closer look at the FCF (free cash flow) numbers.
Frontier Communications is reporting FCF of $285 million in the snapshot shown above. The dividend payout was about $100 million which converts to a FCF payout ratio of 35% as reported by FTR. Sounds like a very safe ratio but it is important to note it is accompanied by note 5 which states:
FCF as defined by Frontier, and excluding acquisition and integration costs and capex.
The traditional measure of FCF is defines as cash from operations minus capex which produces a different picture as opposed to management’s definition. Here is how management calculates FCF:
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