In updating my portfolio on these pages for some odd and not really fundamentally-driven transactions, I also need to note that I’m now an owner of Frontier Communications, the big regional wireline telecom company.
I picked up the shares as a reward for my Verizon shares, a special dividend that they made as part of the deal to sell Verizon’s slowly deteriorating wireline business to Frontier, which in turn will continue to wring cash flow out of those assets and leverage them up as much as they can to generate income for shareholders.
This is a small position for me, and I’m not inclined to sell it reflexively, though I would not have bought it on my own accord — the 10% yield is nice, of course, but investors in FTR and its contemporaries (like Qwest and Windstream) are essentially just making the came calculations as folks who buy a natural gas or energy trust with depleting assets: how long will it take to run the reservoir dry, and how much income can I wring out of it before that happens. In the case of a natural gas trust, for example, a 10% yield doesn’t sound so great if you know that the company only has six years of reserves left at current production levels and no other assets, but unfortunately the calculus for figuring out the decline in rural wireline subscriptions, and the declining margins on those subscriptions, is beyond me at this point.
On the plus side, spinoffs can sometimes create great buying opportunities — that’s because the spun-off company gets reflexively sold by the shareholders in the parent, for a variety of reasons, and because, in theory, the newly spun-off company will be freer to pursue its own interests as an independent entity. Of course, in this case things are a bit different because Frontier Communications was around before, and publicly traded before (it was big, too — in the S&P 500 even before it grew with this Verizon deal, and was the highest dividend yielder in that big cap index).
But still, I prefer to have a good reason to sell stuff — especially if it’s generating a dividend, so I’ll just watch these “free” shares for a while and see if they maintain their share price (they’ve been pretty steady for ...