If you’re a potential investor in telecommunications company Frontier Communications Corp (NASDAQ:FTR) you may find the allure of a 10% dividend yield drawing you in. However, if you look at the risk section of the company’s form 10-K you will find five risks that may give you pause in your consideration for investment.
Market shift away from landline service
The very first risk listed in Frontier Communications Corp (NASDAQ:FTR)’s risk section states:
“We will likely face further reductions in voice customers, switched access minutes of use, long distance revenues and federal and state subsidy revenues, which could adversely affect us.”
Frontier Communications Corp (NASDAQ:FTR)’s focus lies in bringing landlines and broadband to rural areas, while in the rest of the market and even in some rural areas, customers continue to switch from landline to total cell phone usage. Frontier Communications Corp (NASDAQ:FTR)’s loss in landline customers amounted to 7% in 2012, resulting in a 4% decline in its revenue. Frontier Communications Corp (NASDAQ:FTR)’s net income declined steadily since 2010. A loss in customer base of this magnitude would represent a horror to any potential business owner such as you.
Intense wireless competition
Another interesting risk they noted:
“We face intense competition, which could adversely affect us.”
Interestingly, telecommunications company Verizon Communications Inc. (NYSE:VZ) sold a huge chunk of its wireline business in 2010 to Frontier Communications Corp (NASDAQ:FTR) so that Verizon Communications Inc. (NYSE:VZ) can focus on its wireless business. Now, Verizon Communications Inc. (NYSE:VZ) expands revenue and profitability by conquering Frontier’s and others’ landline marketplace with wireless market expansion.
In 2012, Verizon Communications Inc. (NYSE:VZ)’s overall revenue increased 4%. An 8% revenue increase in Verizon Communications Inc. (NYSE:VZ)’s wireless segment contributed to the overall increase in revenue. Wireless revenue comprised 66% of 2012 revenue. Conversely, revenue in Verizon Communications Inc. (NYSE:VZ)’s wireline segment declined 2% in 2012 on top of a 1% decline in 2011, giving indication of a downtrend in landlines.
Another powerful competitor, AT&T Inc. (NYSE:T) derives 52% of its revenue from wireless as well, meaning this company also continues to siphon landline business from the likes of Frontier, Verizon and from itself. AT&T Inc. (NYSE:T)’s voice business as a percentage of overall revenue declined from 23% in 2010 to 18% in 2012.
AT&T Inc. (NYSE:T)’s overall revenue increased 0.6% in 2012. AT&T Inc. (NYSE:T)’s wireless revenue increased 6% in 2012, while its landline revenue decreased 1% in 2012 on top of a 3% decline in 2011.
These two telecommunications companies (Verizon and AT&T Inc. (NYSE:T)) represent a relatively better place to park your money in this industry due to their participation in the growing wireless segment.
The choking weed of debt
Interest payments on debt choke out profitability of any entity, corporate and individual. For Frontier:
“Substantial debt and debt service obligations may adversely affect us.”
In 2012, Frontier’s long-term debt comprised an astounding 203% of stockholder’s equity. Its operating income of $987 million exceeded its interest obligations by only 1.43 times. The general rule of thumb for margin of safety stands at five times interest expense. As you can see, interest expense adversely affects Frontier.
