Does A Frontier-Verizon Deal Make Sense?

Frontier Communications Corp FTR is off about 30 percent in the past three months but an analyst reaffirmed his Buy rating on the company Tuesday, citing a possible dividend boost.

Bank of America's David W. Barden said Frontier's pending deal to acquire $10.4 billion in assets from Verizon Communications Inc VZ "holds the prospects of higher dividends."

To pay for the deal, Frontier earlier this month completed a $750 million common stock offering at $5 a share and also sold $1.75 billion in convertible preferred stock at $100 a share.

Barden, who maintained a $9 target on Frontier, noted that the company boosted its annual dividend 5 percent last year after it completed the acquisition in Connecticut of assets from AT&T Inc. T.

Frontier's dividend payout ratio may improve by 10 percent according to Barden, versus the company's estimate of 8 percent.

Barden cautioned, however, that Frontier may spread the potential dividend increase over several years and use added cash flow to pay down debt.

The company expects its latest acquisition from Verizon, which includes assets in California, Texas and Florida, will close in the second half of this year.

Barden said the deal consists of "prime assets" that require little additional capital spending, while key management personnel "travel with the asset to smooth the transition."

Frontier changed hands recently at $5.09, up $0.07.