Are Earnings or Dividends the Attraction at Frontier Communications?

Telecom provider Frontier Communications Corp. (NASDAQ: FTR) posted better-than-expected EPS after markets closed last night, reporting adjusted EPS of $0.08 compared with the consensus estimate of $0.05. Revenue of $1.26 billion was nearly -5% below expectations.

Shares are up sharply today following the report, and the question is whether the company’s earnings or its 10.8% dividend yield is driving the rise. The adjusted EPS knocks out charges of -$0.06/share, most of which was attributed to a $70.8 million payment for early repayment of debt. Frontier’s annual dividend payment is $0.40/share. That’s a drop of -60% from the annual dividend of $1/share just two years ago.

Frontier lost residential and business wireline customers in the quarter, but picked up 5,400 broadband customers and a net 6,300 video customers. The company still expects free cash flow of $900 million to $1 billion in the full 2012 fiscal year, which is plenty to support Frontier’s rich dividend yield.

A company of about the same market cap, MetroPCS Communications Inc. (NYSE: PCS) does not pay a dividend, and a company nearly six times the size of Frontier, CenturyLink Inc. (NYSE: CTL) pays a dividend yield of 7%. Sprint Nextel Corp. (NYSE: S), which is about 3x bigger than Frontier, does not pay a dividend.

Frontier’s shares are up 11.7% in the early afternoon today at $4.38 in a 52-week range of $3.06-$7.58.

Paul Ausick