Should You Buy This 8.5% Yielding Stock?
I know it’s tempting… But sometimes, as an income investor, when you see a stock yielding 8%, 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.
It is currently the fourth highest yielding stock in the S&P 500.
As readers of my High-Yield Investing newsletter know, I removed Frontier from my portfolio in February. At that time, it was the highest yielding company in the S&P 500.
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, in June the shares fell to about $3.50 but have since rallied back to the upper $4.50 range, a 28% gain in just a few months.
When the shares tanked, insiders started buying, which can be a sign of good things to come. All together, they picked up about 40,300 shares at average prices of $3.28 to $3.34 apiece.
The company is profitable, too. First-quarter earnings totaled $32.2 million, or $0.03 per share. While in the second quarter the company earned $17.9 million, or $0.02 per share.
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.
[Note: Sometimes chasing the highest yielders can be devastating to your portfolio. Instead, you should own what I call “Retirement Saving Stocks.” These pay dividend yields of 7.5%… 8.8%… even 14%. For more details on these investments, and to learn how to get a report about my 10 favorite income stocks to own today, click here.]