Frontier's Year of Living Dangerously

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Frontier Communications (NYS: FTR) has been a darling of dividend fans, and it's not hard to see why, with its yield close to 15%. Yet, year to date, the share price has fallen around 50%. You can see the price-to-yield correlation quite clearly from the chart below:

But the story of Frontier's 2011 stock price decline began in 2010. That's when the company tripled in size by buying some of Verizon's (NYS: VZ) unwanted fixed-line business: 4.8 million rural phone lines in 14 states. The price: $8.5 billion.

So this year, Frontier's big job has been to incorporate those new customers into the fold, customers whose previous owner felt just weren't profitable enough to keep. As Frontier CEO Maggie Wilderotter said last year, "Verizon has not been doing much in those markets...What we care about is keeping the customer...and making sure the customer is happy."

But subsequent Frontier actions put that statement in doubt.

You say FiOS...
Even as the lawyers for Frontier and Verizon were hammering out the final version of the deal in June of last year, Frontier was pledging that it would continue to support the FiOS customers it was getting from Verizon. A page on the company's website even declared that the only change those customers would see is a "more focused local management approach for all your services."

However, this past January, Frontier announced to its new customers living in Indiana, Oregon, and Washington state that it would be raising FiOS prices there by at least 46%. This price-jacking came about in spite of having a competitor, Comcast (NAS: CMCSA) , offering much cheaper rates. Why would Frontier do this? To wean those customers away from FiOS and over to satellite service supplier DIRECTV (NAS: DTV) , apparently, which is what Frontier offered as a FiOS replacement.

As if that did not make it clear enough to consumers that Frontier did not want to be in the fiber-optic data and video delivery business, last March it raised the cost of installing FiOS for its Oregon residents from $79 to $500.

I say satellite
To continue with this theme, Frontier renewed its association with DishNetwork (NAS: DISH) to provide bundled satellite video service in Frontier's 27-state territory.

Some might see switching from fiber-to-the-home to satellite-dish-on-the-roof as a step in the wrong direction. But CEO Wilderotter, during the second quarter earnings conference call, said that using a "wireless modem, [with Dish's IP-based set-top box, we] can do IP video to the TV set."

If the suit fits...
In October, Frontier found itself in some hot water as a federal class-action lawsuit accused the carrier of illegally collecting an "HSI surcharge." The suit argues that the company told its customers that this fee was required by the government, but, the suit claims, "It is merely a junk fee that Frontier imposes on customers...and is nothing other than an effort by Frontier to increase prices above advertising [sic] prices."

It's not personal, it's just business
While it seems that Frontier has been pulling away from its residential customers, it has been increasing its profile in the business arena. The company has expanded its Ethernet coverage to medium-sized and large business users in 55 markets. Wilderotter told the Goldman Sachs Communacopia Conference in October that the business segment provides "51 percent of our revenue and a big upside for revenue is in commercial services."

Don't fight 'em, join 'em
The future in telecom is clearly broadband wireless coverage. Just look at the explosion in smartphone sales to confirm that. So how can a wireline carrier get into the wireless business? By making a reselling deal with a wireless carrier. In Frontier's case, it was an agreement it made in November with AT&T (NYS: T) . This was a necessary move for the company because it isn't the first wireline company to go that route. CenturyLink (NAS: CTL) has also become a wireless reseller in a deal made with Verizon.

Another lump of coal in the customers' stockings
It looks like Frontier has borrowed a page from the original Ma Bell, which required its customers to rent their phones from it. According to website Broadband DSL Reports, Frontier will now only let subscribers rent their DSL modems from Frontier. The fees range from $7/month to $15/month.

Jumping ship
Desertions have had their impact on the company's top line. Revenues have dropped 8% year over year, and quarter three was the third straight showing an increasing rate of revenue decline. Things could have been worse, however, if it weren't for strong cost cutting. This raises important questions. How far can costs be cut before service is degraded? How much can the company hike prices and nickel-and-dime consumers with added fees before they become fed up? And how close can Frontier shave its free cash flow before it draws blood from its all-important dividend?

If that dividend becomes sullied, even Frontier's move to the Nasdaq tomorrow couldn't hide it from disappointed investors.

Next year will be a big one for the telecom industry. Don't get left behind; click here to learn about cloud computing in the Fool's free report: "The Two Words Bill Gates Doesn't Want You to Hear..."

At the time this article was published

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