Better Buy: Frontier Communications Corp. vs. Verizon Communications Inc.

Retirees often let telecoms do they heavy lifting themselves .

Telecoms have long been stalwarts in many retirement portfolios. The telephone represents the ability to communicate with one's family and friends, as well as the outside world, and it's one of the last conveniences that families will give up, even in hard economic times. With such reliable cash flows, and such high barriers to entry for new competitors, the dividends coming out of these companies help retirees rest easy at night.

Two telecom options that retirees have for their investment dollars are giant Verizon -- which has a stock yielding a more-than-respectable 4.4% -- and much smaller Frontier -- which has a sky-high dividend yield of 9% right now.

Based on this fact alone, you might think that Frontier was the better choice. But basing a buy or sell decision on one metric alone is not a wise way to allocate your retirement dollars. Here are the three key facts that investors need to understand before making their decision.

Financial fortitude

One of the reasons that telecom companies enjoy high barriers to entry is because there are enormous upfront capital costs. Companies need to lay out wires across the country, send satellites into space, build out extensive networks -- and then maintain them. Simply put, you need a boatload of money -- and patient investors -- if you want to enter the game.

But there's a downside to such competitive protection: financial fragility. By that, I mean that telecom companies need to take on loads of debt -- much more than the cash that they have on hand. Usually, this is OK, as the way that the debt is structured allows the companies to function just fine. Verizon and Frontier are no exception to this rule.

Here's a look at their cash and debt loads, along with how much net income and free cash flow (FCF) each company produced over the last twelve months.

Company Cash Debt Net Income Free Cash Flow
Frontier $1.01 billion $16.3 billion ($79.1 million) $470 million
Verizon $4.8 billion $110.2 billion $10.3 billion $18.8 billion

Source: Yahoo! Finance

Verizon's market cap is roughly 40 times that of Frontier, so the huge differences between them on all of these metrics are understandable.

Relative to its cash, Frontier actually has less debt than Verizon. And even though net income is negative for Frontier, a much more reliable indicator of the company's health is its free cash flow.

In the end, the financial fortitude of telecoms is never pretty, as lots of debt is the name of the game.


Sustainable competitive advantages

I've already mentioned that one of the biggest advantages telecoms have is the high barrier to entry around the industry. But that doesn't mean these companies don't compete for customers. It's important to understand the differences between these two players, and how sustainable their advantages are.

Verizon has its hands in wireless phones, Internet, and cable. The company bought the 45% stake in Verizon Wireless owned by Vodafone , and is now the sole owner of the business. According to Strategy Analytics, the company is the No. 1 U.S. retail wireless company with over 30% market share.

The company's FiOS Internet product isn't faring as well: While the number of video subscribers is up, growth in the pay TV business faces serious headwinds from cord-cutting. And the company could be facing stiff competition in providing broadband Internet access from Alphabet 's Fiber.

But Frontier is still in a much weaker position. The company largely operated traditional landlines in rural areas, but has recently made inroads into broadband as well. It bought AT&T 's broadband service in Connecticut in 2014, and is currently closing a deal for Verizon's FiOS networks in California, Florida, and Texas.

If Verizon was willing to part ways with those properties, I wonder what makes Frontier think it can do a better job with them. Plus, Frontier's initial foray in Connecticut was rife with missteps.



There are two parts to valuing a telecom. The first is evaluating how expensive the stock is; the second is gauging how sustainable its dividend is. We can tackle them both at the same time by evaluating some common metrics.

Company P/E P/FCF P/S Div. Payout From FCF
Frontier 36 11 0.9 106%
Verizon 12.5 11 1.6 41%

Sources: Yahoo! Finance, E*Trade

On the valuation front, I'd say that Verizon has the upper hand. In terms of P/FCF -- the metric I lend the most credence to -- both companies trade at a multiple of 11. But with Verizon, you get a market leader, which just sold off some of its less desirable FiOS properties. In Frontier, you get the company that bought those properties, and has considerable execution risk.

We get the same result when we look at dividends. Frontier has actually paid out more in dividends over the past twelve months than it has taken in from free cash flow. That's not a good sign. With Verizon, you get a dividend with little threat of being cut, and tons of room for growth. Frontier, on the hand, has made two major dividend cuts in the past decade.


There's little doubt in my mind that for most investors -- and especially retirees -- Verizon is a much better bet for your portfolios.

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The article Better Buy: Frontier Communications Corp. vs. Verizon Communications Inc. originally appeared on

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Brian Stoffel owns shares of Alphabet (A shares) and Alphabet (C shares). The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool 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 .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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