When dividend yields look too good to be true, they usually are. Yet, occasionally, there are yields that are incredibly attractive. The 5% yield offered by General Motors (GM) is such an example. Few blue-chip companies come close to this yield. And GM shares are cheap so the dividend is even more meaningful.
But there is a current dividend yield that is astonishingly high today. In fact, the yield is a clear signal that the market believes the dividend is unsustainable. Still, I believe the market may be wrong on this one, at least for the next several years, which potentially implies an annual return of 10% or more for years to come.
Telecommunications company Frontier Communications (FTR) currently yields 13% thanks to a recent share price decline of more than 15% reflecting a weaker-than-expected quarterly result.
Trading at around $3.20 per share, Frontier currently pays a $0.10 quarterly dividend. The shares are trading at a historical low, which also suggests they may be attractive given that Frontier recently completed an acquisition for broadband customers of Verizon (VZ) in California, Texas, and Florida, which doubled the company's revenue.
So far, the acquisition hasn't met analyst expectations. In the recent quarter, Frontier reported a decline in revenues although profit was in line. Still, the concern that Frontier's latest acquisition might not pan out sent the stock sinking. More so, that concern about the future raises questions about the future of the dividend.
Frontier's dividend is central to its investment thesis. In fact, the company's dividend history begins back in 1956 and remained uninterrupted until 1998. When the dividend was resumed in 2004, it was with a hefty special dividend and the payout has remained uninterrupted ever since. Unfortunately for stockholders, the stock price has lost tremendous value, so the dividend yield alone has not been enough. Over the past 10 years, Frontier's share price has declined from $14 to $3 today.
The current 13% yield strongly suggests that the dividend is not sustainable. Yet during the recent quarter, the dividend represented a payout ratio of less than 60% of available cash flow. Thus, if management can continue to integrate the recent acquisition, and they are committed to just that, the dividend is in safe hands. And with the stock price trading where it is, it's hard to see it going significantly lower in the long term.
Management will play a pivotal role and I believe they will. But Frontier's current business continues to support the dividend and that will likely remain the case for the next several years. Therefore, Frontier's annualized return could be quite attractive going forward.