Why Frontier Communications Corporation Stock Lost 20.5% in December

1/4/18

By Keith Noonan, MoitleyFool

What happened

Shares of Frontier Communications Corporation (NASDAQ:FTR) shed 20.5% in December, according to data provided by S&P Global Market Intelligence. The big sell-offs appear to have been driven by unfavorable ratings coverage, poor business performance throughout 2017, and investors unloading the stock after its dividend record date.

A city at night with various buildings connected by lines representing an internet network.

IMAGE SOURCE: GETTY IMAGES.

So what

In a note published Dec. 15, Barclays gave the stock a $7 price target (representing roughly 18% from the company's share price at the time of publication) and indicated that the company was likely to make another another cut to its dividend payout. Dec. 15 was also the company's dividend record date, and the stock shed roughly 16% of its value from this date through the end of the month.

The big losses in December followed a roughly 30% haircut for the stock in November that was triggered by a disappointing earnings report and a negative ratings note from Morgan Stanley. After a year that saw the company incur substantial losses, management setbacks, a dividend cut, and diminished prospects for its turnaround efforts, investors may also have opted to cut their losses with the stock in December for tax purposes or other reasons.

Now what

Frontier stock trades at just 0.06 times forward sales estimates and offers a 33% yield, but value-seeking investors should still proceed with caution. The stock's big dividend yield is a sign that the company is otherwise having trouble attracting investors. The payout will also likely be difficult to maintain unless business sees significant improvement. The company cut its dividend by 62% in May 2017, then carried out a 15-for-1 reverse stock split in July, and it looks like another dividend cut could be in the cards.

Frontier's acquisition of wireline assets from Verizon does not look like it will pan out the way that the company anticipated, with cord-cutting trends and waning demand for phone-line-based internet casting the move in a questionable light and potentially weighing on the company's ability to sustain its payout. To its credit, Frontier is trimming the fat on its business, with over $1 billion in cost-saving initiatives already carried out since the wireline acquisition and plans for an additional $350 million in expense reductions. That should provide some earnings momentum, but the company is still guiding for losses in fiscal 2018, and its turnaround prospects are looking dismal.

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