It's not that the third quarter was terrible. Windstream hit analyst estimates right on the nose with adjusted earnings of $0.09 per share on $1.55 billion in sales.
But, management lowered its fourth-quarter forecast for -- take a deep breath, please -- adjusted operating income before depreciation and amortization, or OIBDA. That non-standard metric is a key component of Windstream's adjusted cash flow calculations, so anything that pushes OIBDA down will also threaten the company's stellar dividend.
After Thursday's price drop, Windstream's dividend yield stands at 11.7%. That's the third-highest yield you'll find on the S&P 500 index, trailing only Pitney Bowes' (NYSE: PBI ) 12.3% yield, and R.R. Donnelly's (Nasdaq: RRD ) 10.8% payout. Both stocks are trading near multi-year lows, just like Windstream. It's a painful way to boost your dividend yield.
These are the kinds of dividends that people build portfolios around. You can bet your pants that the stock would plunge drastically if management ever dared to lower those juicy payouts. And that goes a long way toward explaining this week's hair-raising drop -- the yield really is at risk.
Oh, CEO Jeff Gardner put a positive spin on it. It's kind of his job, and he's kind of getting used to it. He said:
I am confident in our ability to deliver strong free cash flow long-term to support our dividend. The dividend is a key component of our investment thesis, and we believe it is the best way to provide returns to our shareholders.
Yeah, but Windstream may soon have to dip into cash reserves to keep those quarterly checks flowing. The company has converted 66% of that OIBDA-based adjusted free cash flow into dividend checks this fiscal year -- and a heart-stopping 81% in the third quarter.
Keep in mind that these are heavily-adjusted numbers. Windstream backs out inconvenient items, like pension plans and merger expenses. The free cash flows that Fools know and love added up to an even $100 million this quarter, which is far less than the $147 million spent on dividend checks.
And it's not exactly recent news, either. Watch the spread between cash flow yields and dividend yields shrinking to nearly nothing, then see the payout ratio spike:
Windstream must reverse this terrible trend, or risk losing investor confidence on a massive scale. Dividend cuts are all the rage among European telecoms right now; France Telecom (NYSE: FTE ) just slashed its dividend budget by the ankles, and Telefonica (NYSE: TEF ) put its policy on ice altogether. Will Windstream be the first American telecom to go down that dark road?
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