Wednesday, May 3

Today Frontier Communications announced a deep dividend cut that had been the topic of analyst speculation for some time. The market responded by sending the common stock down 14% in a single day – despite the reality that this was coming and it will dramatically improve the financial position of this company. Before the cut FTR was paying an annual dividend of 20%, despite having just acquired more than two million new customers from Verizon and AT&T and dramatically expanding their fiber network. That acquisition comes with costs, this wasn’t the time for a high dividend (I honestly don’t know when it would be appropriate to pay dividends that high).

Unfortunately for our unrealized gains log investors seem to be over-applying the DCF model in pricing FTR, so we’re going to face some short term losses. Fortunately the preferred can’t fall as dramatically as the underlying shares (which is why we’re holding them), but that portion of our position faced losses nearing 10% in trading today. This is realistically as far as it can fall – at this price the break even for the underlying shares is just over $1.00. The preferred shares have become an even better deal than when we acquired them. We were definitely expecting FTR/PR to fall to this level, we just weren’t expecting it until after the next distribution. We’re currently debating growing that position, but it was already as large as we were comfortable with it being.

Even if your price target for FTR is as low as $2.00 for next year though, the preferred shares remain a very strong buy.

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