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Frontier Communications Corporation (FTR - Analyst Report), a provider of telecommunication services in rural areas and small and medium-sized towns of U.S., has prioritized network expansion and dividend payment over debt reduction.

Frontier is expanding its broadband network and is ramping up its broadband Internet speed by utilizing DSLAM architecture along with ADSL2+ and VDSL2 technology. This will allow the company to provide a speed of 20 Mbps to 52% of its subscriber base by the end of 2013 and 60% of its customers by 2013.

Currently, the company pays a dividend of 40 cents annually and in the recently ended second quarter the company has paid $100 million as dividend, which translates into a pay-out ratio of 57%. Frontier announced that it will use its free cash flow to expand its fibre-to-broadband network and pay dividends. The company expects its free cash flow of $825-$925 million.

Frontier is the least indebted telecom company among its peers with a long-term debt of $7,900.9 million at the end of second-quarter 2013. Other small telecom carriers like CenturyLink Inc. (CTL - Analyst Report) has a long term debt of $20,283 million, while Windstream Corporation (WIN - Analyst Report) has a total debt obligation of $8867.9 million at the end of second quarter.
However, out of $7900.9 million debt, Frontier has only $402 million of debt, which is maturing within 2015. The company wants to use its free cash flow to repay its immediate debt and meet its long-term leverage ratio target of 2.5.

Frontier’s revenues continue to remain under pressure due to declining voice revenues along with reduced switched and non-switched access revenues. We believe that the company needs to improve its top line to maintain its investment and dividend payment target.

Recently, Frontier reported adjusted earnings per share of 6 cents in second-quarter 2013, down 25% from the prior-year figure but in line with the Zacks Consensus Estimate. However, quarterly revenues of $1,190.5 million failed to meet the Zacks Consensus Estimate of $1,196.0 million.

Frontier currently carries a Zacks Rank #3 (Hold). Other stock worth considering within the same sector is Cincinnati Bell Inc. (CBB - Analyst Report), which currently carries a Zacks Rank #1 (Strong Buy).

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