Windstream: Dividend Dynamo or Blowup?

Dividend investing is a tried-and-true strategy for generating strong, steady returns in economies both good and bad. But as corporate America's slew of dividend cuts and suspensions over the past few years has demonstrated, it's not enough simply to buy a high yield. You also need to make sure those payouts are sustainable.

Let's examine how Windstream (Nasdaq: WIN  ) stacks up in four critical areas to determine whether it's a dividend dynamo or a disaster in the making.

1. Yield
First and foremost, dividend investors like a large forward yield. But if a yield gets too high, it may reflect investors' doubts about the payout's sustainability. If investors had confidence in the stock, they'd be buying it, driving up the share price and shrinking the yield.

Windstream yields a whopping 7.9%, considerably higher than the S&P's 1.8%

2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company paid out in dividends last year to the earnings it generated. A ratio that's too high -- say, greater than 80% of earnings -- indicates that the company may be stretching to make payouts it can't afford, even when its dividend yield doesn't seem particularly high.

Windstream's payout ratio is a fairly alarming 185%. However, the company spends considerably less on capital expenditures than its depreciation charges. When we look at the company on a free cash flow basis, that figure falls to 78%.

3. Balance sheet
The best dividend payers have the financial fortitude to fund growth and respond to whatever the economy and competitors throw at them. The interest coverage ratio indicates whether a company is having trouble meeting its interest payments -- any ratio less than 5 is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.

Let's examine how Windstream stacks up next to its peers:

Company

Debt-to-Equity

Interest Coverage

Windstream

934%

2 times

CenturyLink (NYSE: CTL  )

74%

4 times

Frontier Communications (NYSE: FTR  )

163%

2 times

Verizon (NYSE: VZ  )

69%

7 times

Source: Capital IQ, a division of Standard & Poor's.

On these two measures, it's clear Windstream carries a significant debt ratio when compared to its peers.

4. Growth
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.

Over the past five years, Windstream's earnings per share have fallen at a 12% annual rate, while free cash flow has declined slightly and its dividend has remained flat.

The Foolish bottom line
Windstream exhibits a fairly reasonable dividend bill of health. It has a massive yield and -- at least on a free cash flow basis -- a moderately high payout ratio. Dividend investors will want to watch the company's earnings growth and stability to make sure it's able to continue supporting that payout, particularly in light of its fairly significant debt load.

To stay up-to-speed on the top news and analysis on Windstream, or any other stock, simply click here to add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.

Ilan Moscovitz doesn't own shares of any companies mentioned. You can follow him on Twitter @TMFDada. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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