News Analysis date published New: 
Wednesday, June 20, 2012 - 11:30
New Date created: 
Wednesday, June 20, 2012 - 11:30
New Date last updated: 
Wednesday, June 20, 2012 - 11:30

Should You Own the Highest-Yielding Stock in the S&P?

Wednesday, June 20, 2012 - 11:30am

I know it's tempting... But sometimes, as an income investor, when you see a stock yielding 10%, 11% or even more -- it pays to hold off on pulling the trigger with that buy order.

The good news is that sometimes all it takes is a little homework, including an understanding of the risk involved and a proper expectation of performance.If it still looks appealing, then by all means, make the purchase.

I recently ran into this situation when asked about a former holding in my High-Yield Investing newsletter.

It's understandable. In fact, I imagine this stock has shown up in a lot of investors' screens for high-yielders or losing stocks that might now be bargains. So I thought it would be worthwhile to tell you about the stock and why it might be worth considering for your portfolio.

The stock is Frontier Communications (Nasdaq: FTR), a rural telecom that has about 15,400 employees and provides telephone, broadband, satellite TV and wireless Internet services to households and businesses in small to mid-sized markets in 27 states.

As readers of my High-Yield Investing newsletter know, I removed Frontier from my portfolio about five months ago. At that time, it was trading above $4.50 a share. Since then, the shares have lost about 25% and the quarterly dividend has been cut nearly in half, to $0.10 per share from $0.188. Still, the shares offer a tempting 11%-plus yield at this dividend rate.

So is Frontier a steal at today's price? My reflex response is "never catch a falling knife," meaning the shares could go lower yet. That said, the shares have been hovering around the $3.30-$3.50 range for about two weeks and may be stabilizing.

Meanwhile, insiders have been buying. In the past couple weeks alone, executives and board members scooped up about 40,300 shares at average prices of $3.28 to $3.34 apiece.

The company is profitable. First-quarter earnings totaled $26.8 million, or $0.03 per share. Free cash flow of $253 million amply covered the first-quarter dividend by 2.5 times. Moreover, the shares are trading well below their book value of $4.39 per share. (Simply put, book value is what you would get after all debts are paid, if the company were to liquidate.)

Risks to Consider: That's not to say all is well with this telecom. Revenues are declining as the loss of landline customers is not being offset by growth in broadband Internet and TV. Management also has an atrocious dividend record. The dividend was cut twice in the last two years, and the latest cut came about a year after management assured shareholders there was enough free cash flow to maintain the dividend at the then-current rate.

Action to Take --> Frontier is not for the faint-hearted. If you're looking for a reliable dividend grower with steady cash flow, one of my other High-Yield Investing portfolio holdings is probably a better bet. But if you're looking for a higher-yield play that may be oversold and undervalued at today's price, Frontier is worth considering.

[Note: If you haven't already seen it, don't miss StreetAuthority's report -- "Top 5 Income Stocks for 2012." These five select investments pay dividend yields of 7.5%... 8.8%... even 11.5%. For more details on these investments, you can visit this link without having to sit through a video presentation.]

Carla Pasternak does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.