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

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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.

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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