Specifically, many of these bonds offer big coupons and very attractive yields to maturity. And what makes them even more attractive to us is that many of them are far safer than the stock. For example, Frontier has some 2025 bonds that offer 11% interest payments (10.496% YTM). And not only does Frontier have the cash flow to keep paying these bonds now, they have the ability to cut the stock dividend in the future which will free up even more cash flow to pay the bonds if needed. And if Frontier does cut the dividend, the bonds will likely experience an immediate jump in price because the market will perceive the bonds as even safer (i.e. cutting the dividend frees up more cash flow thereby making the bonds safer).
Generally speaking, companies don’t stop paying interest on their debt unless they’re going into bankruptcy, and that’s not the case for Frontier (i.e. Frontier has plenty of business and cash flow to remain a going concern). And as we mentioned earlier, the government has a vested interest in NOT letting Frontier go into bankruptcy (i.e. the government wants Frontier to keep serving the areas that it does, and that’s exactly why Frontier receives all those government subsidies). Unless some hostile takeover occurs, whereby the barbarians intentionally take Frontier into bankruptcy, the bonds are money good (especially considering the government regulators want Frontier to stay in business).
Risks
As we mentioned earlier, Frontier Communications Corp (NASDAQ:FTR)’s business faces a variety of risks that are worth considering. For example, Frontier serves customers in dispersed regions across the US which makes supporting the network expensive. And in many areas, the network has been neglected and requires significant capital expenditures. Other risks include the threat of a reduction in government subsidies, potential competition from wireless providers, costly pension obligations, the costs of unionized workers, and customers angry about the quality of service. However, despite the risks, there are a lot of stakeholders that want the company to remain a going concerns such as the government regulators, the customers that have no other viable phone and data options, and the investors and management that have skin in the game.
Conclusion
If it’s big safe yield that you’re after, consider Frontier Communications Corp (NASDAQ:FTR)’s high-yield bonds, not the stock. Frontier will cut the huge dividend on its stock long before it defaults on its debt. And if you are interested in more companies with big dividends and a high level of fearful investors (like Frontier), consider this list of 40 Big Dividend Stocks with High Short Interest. Lastly, and most importantly, don’t subject yourself to unnecessary risk (unless you want to) such as is the case with Frontier’s stock.
Note: This article was written by Blue Harbinger. At Blue Harbinger, our mission is to help you identify exceptional investment opportunities while avoiding the high costs and conflicts of interest that are prevalent throughout the industry. We offer additional free reports and a premium subscription service at BlueHarbinger.com. If you are ever in the Naperville, IL, USA area, our founder (Mark D. Hines) is happy to meet you at a local coffeehouse to talk about investments. Please feel free to get in touch.
