Buy, Sell, or Hold: Windstream

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether it's possible upside outweighs its risks. Let's take a look at Windstream (NYSE: WIN  ) today, and see why you might want to buy, sell, or hold it.

Based in Little Rock, Ark., and with a market capitalization of about $5.7 billion, the telecom company focuses on serving rural areas and has averaged about 1.6% in annual growth over the past five years. It might thus seem unappealing, but don't be hasty. Let's examine it more closely.

The biggest attraction for the stock may be its dividend, which recently yielded a whopping 10.7%.

Its industry is another plus, with global telecommunications services expected to grow to $1.8 trillion in three years. Windstream serves customers -- mostly in far-flung regions -- with phone, Internet broadband, and digital TV services, along with IP-based voice and data services. It serves more than 3 million access lines in 29 states. It's serving businesses, too, with phone and cloud computing services among other things.

A look at the company's numbers will reveal many appealing ones. Revenue from its business services (as opposed to consumer services) is growing at an accelerating pace, last at 3.2%. Cash flow from operations has been growing in recent years, and overall free cash flow has topped $500 million over each of the past five years, recently nearing $700 million. Revenue has also been rising, though earnings have been lumpy.

In managing its debt, Windstream maintains a "BBB-" rating from the folks at Fitch. A recent rating report offered some bullish thoughts on the company:

Windstream's revenues have become more diversified as recent acquisitions have brought additional business and data services revenue. Following the fourth quarter 2011 acquisition of PAETEC, business service and consumer broadband revenues, which both have solid growth prospects, were 68% of revenues in the first quarter of 2012. These positive factors aid in offsetting the effect of competition for consumer voice services on the company's operations, which is Fitch's principal concern.

Acquisitions have indeed been playing a key role in Windstream's growth strategy -- as they have for its peers as well. CenturyLink (NYSE: CTL  ) , for example, swallowed Qwest, while Frontier Communications (NYSE: FTR  ) gobbled up Verizon's (NYSE: VZ  ) rural phone lines. Windstream has acquired Iowa Telecommunications, NuVox, and Q-Comm, among many others, and a major recent buy has been PAETEC; at $2.3 billion it's the company's largest so far. The deal boosts Windstream's services to businesses, increases its broadband capacity, and gives it thousands of miles of fiber network. Indeed, the purchase has already doubled earnings.

Valuation is another appealing factor. The stock has traded between about $9 and $13 per share over the past year and has recently been near $10. My colleague Brian Pacampara saw a recent price drop as a promising buy-in opportunity.

One downside to the company is its landline business, as more and more Americans switch over to mobile-only communications. Windstream has been combating that with its growing focus on broadband and business services, though.

The company's massive dividend has a drawback or two, as well. For one thing, it hasn't been increased in about five years. And given that it's paying out $1 per share per year, while its trailing 12 months' earnings per share is $0.38, certainly gives me pause. Although assessing cash flow matters primarily in funding a dividend, any cut to Windstream's payouts could send investors rushing for the doors. Still, even if it's cut by two-thirds, it would yield about 3.6%, which is a solid payout. And for the record, last quarter management affirmed plans to maintain the dividend.

Debt is another concern, as the company's long-term debt has been rising over the past few years, and totaled $8.8 billion at the end of its first quarter, compared with less than $100 million in cash and just $1.1 billion in total assets. The company is working to refinance some of its debt and reduce its leverage.

Hold (off)
Given the reasons to buy or sell Windstream, it's not unreasonable to decide to just hold off. You might want to wait for its debt load to shrink more, or for revenue to grow more briskly.

If you already own shares of Windstream, you might just hang on for the dividend yield alone, as it towers over most other income-producing alternatives. 

The verdict

I actually already own Windstream, having been drawn to it by its dividend. Everyone's investment calculations are different, though. Do your own digging and see what you think. Windstream may well perform spectacularly in the coming years, but there are plenty of compelling stocks out there.

If you're looking for more exciting investment opportunities, know that there's a huge market in the making. Our free report, "The Next Trillion-Dollar Revolution" will tell you how you can profit by it. Get your free copy by clicking here.

Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns shares of Windstream and Verizon Communications, but she holds no other position in any company mentioned. Click hereto see her holdings and a short bio. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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