I know it's tempting... But sometimes, as an income investor,
when you see a stock yielding 10%, 11% or even more -- it pays to
hold off on pulling the trigger with that buy order.
The good news is that sometimes all it takes is a little
homework, including an understanding of the risk involved and a
proper expectation of performance.If it still looks appealing, then
by all means, make the purchase.
I recently ran into this situation when asked about a former
holding in my High-Yield Investing newsletter.
It's understandable. In fact, I imagine this stock has shown up
in a lot of investors' screens for high-yielders or losing stocks
that might now be bargains. So I thought it would be worthwhile to
tell you about the stock and why it might be worth considering for
your portfolio.
The stock is
Frontier Communications (Nasdaq:
FTR
)
, a rural telecom that has about 15,400 employees and provides
telephone, broadband, satellite TV and wireless Internet services
to households and businesses in small to mid-sized markets in 27
states.
As readers of my
High-Yield Investing
newsletter know, I removed Frontier from my portfolio about five
months ago. At that time, it was trading above $4.50 a share. Since
then, the
shares
have lost about 25% and the quarterly
dividend
has been cut nearly in half, to $0.10 per share from $0.188. Still,
the sharesoffer a tempting 11%-plus
yield
at this dividend rate.
So is Frontier a steal at today's price? My reflex response is
"never catch a
falling knife
," meaning the shares could go lower yet. That said, the shares
have been hovering around the $3.30-$3.50 range for about two weeks
and may be stabilizing.
Meanwhile, insiders have been buying. In the past couple weeks
alone, executives and board members scooped up about 40,300 shares
at average prices of $3.28 to $3.34 apiece.
The company is profitable. First-quarter
earnings
totaled $26.8 million, or $0.03 per share.
Free cash flow
of $253 million amply covered the first-quarter dividend by 2.5
times. Moreover, the shares are trading well below their
book value
of $4.39 per share. (Simply put, book value is what you would get
after all debts are paid, if the company were to
liquidate.)
Risks to Consider:
That's not to say all is well with this telecom. Revenues are
declining as the loss of landline customers is not being offset by
growth in broadband Internet and TV. Management also has an
atrocious dividend record. The dividend was cut twice in the last
two years, and the latest cut came about a year after management
assured shareholders there was enough free cash flow to maintain
the dividend at the then-current rate.
Action to Take -->
Frontier is not for the faint-hearted. If you're looking for a
reliable dividend grower with steady
cash flow
, one of my other High-Yield Investing portfolio holdings is
probably a better bet. But if you're looking for a higher-yield
play that may be oversold and undervalued at today's price,
Frontier is worth considering.
[
Note:
If you haven't already seen it, don't miss StreetAuthority's report
-- "
Top 5 Income Stocks for 2012
." These five select investments pay dividend yields of 7.5%...
8.8%... even 11.5%. For more details on these investments,
you can visit this link
without having to sit through a video presentation.]
-- Carla Pasternak
Carla Pasternak does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.