Deutsche Bank Says Buy the Weakness in This Big Dividend Telecom Stock

By Lee Jackson Updated Jan 13, 4:58AM EST · Published Aug 3, 10:45AM EDT

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Deutsche Bank Says Buy the Weakness in This Big Dividend Telecom Stock — © Thinkstock

Every once in a while, investors get the kind of gift that pays off in an outstanding way because others investors shoot first and ask questions later. That may be the case for the highest yielding stock in the S&P 500, and after investors took the stock to the proverbial woodshed on Tuesday, top Wall Street banks are not only defending the company, one says to buy the weakness now.

Frontier Communications Corp. (NASDAQ: FTR) is the second-largest U.S. rural incumbent local exchange carrier, providing service in small and medium-sized towns and cities. The company provides voice, internet access, data and enhanced communications services. The company completed the acquisition of AT&T’s wireline business in Connecticut in October 2014 and recently completed the acquisition of Verizon’s wireline businesses in California, Florida and Texas.

The company reported after the close on Monday, and although results came in below estimates, the miss was very small and the underlying data was actually positive. The company’s full-year EDITDA guidance of $3.6 billion implies a second half of the year run-rate of $4.1 billion, which is ahead of the consensus of $4 billion. In addition, the run-rate free-cash-flow continues to cover the dividend right at two times, which remains the best in the telecom sector.

In a research note, Deutsche Bank says to Buy the stock on this weakness, and while it concedes there will be some volatility on what it terms as a “messy” quarter, the underlying stock still makes good sense for investors. Most importantly for investors, the firm remains confident that the free cash flow and dividend safety parts of the equation are in good shape. Toss in almost 15% of the float being sold short, and you have the ingredients for a rally at some point.

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The Deutsche Bank analysts aren’t alone in their defense of the stock. Merrill Lynch also remains a big fan of the company, and while it lowered its price stock to $7.50 from $9, which looks far more reasonable, the firm said this in its coverage of the company.

With a $0.42 annual dividend and 1.17 billion shares outstanding, we estimate a 56% dividend payout ratio in 2017. Frontier has an 8.66% dividend yield, the highest yielding component in the S&P 500, yet this payout ratio will be the lowest of any dividend paying telecom stocks we cover.

The Deutsche Bank price target remains at $6, and the Wall Street consensus target is $6.07. Shares closed Tuesday at $4.85, down a whopping 4.5% on the day.

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About the Author Lee Jackson →

Lee Jackson has covered Wall Street analysts' equity and debt research and equity strategy daily for 24/7 Wall St. since 2012. His broad and diverse career, which included a stint as the creative services director at the NBC affiliate in Austin, Texas, gives him unique insight into the financial industry and world.

Lee Jackson's journey in the financial industry spans over 30 years, with nearly two decades as an institutional equity salesperson at Bear Stearns, Lehman Brothers, and Morgan Stanley. His career was marked by his presence on the sell side during pivotal Wall Street events, from the dot.com rise and bubble to the Long Term Capital Management debacle, 9/11, and the Great Recession of 2008. This is a testament to his resilience and adaptability in the face of market volatility.

Lee Jackson’s practical financial industry experience, acquired from a career at some of the biggest banks and brokerage firms, is complemented by a lifetime of writing on various platforms. This unique combination allows him to shed light on the intricacies and workings of Wall Street in a way that only someone with deep insider experience and knowledge can. Moreover, his extensive network across Wall Street continues to provide direct access for him and 24/7 Wall St., a privilege few firms enjoy.

Since 2012, Jackson’s work for 24/7 Wall St. has been featured in Barron’s, Yahoo Finance, MarketWatch, Business Insider, TradingView, Real Money, The Street, Seeking Alpha, Benzinga, and other media outlets. He attended the prestigious Cranbrook Schools in Bloomfield Hills, Michigan, and has a degree in broadcasting from the Specs Howard School of Media Arts.