Wells Fargo Says Frontier Communication's Dividend Is Safe, Sees Free Cash Flow Growth Ahead

Analyst Jennifer Fritzsche's confidence is due to Frontier's continuous focus on reducing its cost. She believes that based on the expectation of $4 billion EBITDA next year, the company could generate gross free cash flow of about $1.0 billion with a 48.7 percent payout ratio next year. Her calculation was based on $1.5 billion expected CAPEX and $1.55 billion interest costs from estimated EBITDA.

The brokerage believes the payout ratio is lowest among the RLEC group even after taking into consideration the preferred dividend payout ratio. Therefore, an Outperform rating was reiterated with a valuation rage of $8.50–$9.00.

In a research note, the analyst said, "We think improved broadband penetration and upside potential to synergy targets with acquired Verizon and AT&T properties will drive better-than-expected FCF growth over the next 2+ years."

Stating that concerns on covenant violation is overblown, Wells Fargo estimates "$500 million lower to be in breach of its credit agreement." The brokerage is not worried about challenges in revenue after 2017 since there is opportunity to save about $1.25 billion in operating costs.

For the current year, the analyst has lowered the EPS estimates from a loss of $0.03 a share to a loss of $0.05 a share in 2016. For the year 2017, the revised estimate is a loss of $0.08 a share compared to a loss of $0.07 a share projected earlier.

At time of writing , the stock was seen down 0.97 percent at $51.38.

Full ratings data available on Benzinga Pro.