Why Windstream Is Worth a Closer Look

Windstream (NASDAQ: WIN  ) doesn't have a very long history, having been formed back in 2006 from the merger of the local telephone businesses of two companies, Alltel and Valor Communications. Although those predecessor companies claim legacies going back 70 years, Windstream started with a fairly modest scope, serving a total of 3.4 million access lines across 16 states. In six short years, however, the company has grown extensively, and it has become popular due to its extremely generous dividend payments. But as rural telecom companies face ever-increasing competition, Windstream is struggling to convince investors that it will be around for the long haul.

I've crafted a premium research report on Windstream that goes into more detail about the rural telecom company. In the excerpt below, I take a closer look at the investment opportunity that Windstream presents right now.

The opportunity
Traditionally, telecom companies acted much like utilities. They provided basic phone service under heavy regulation, with rates calculated to help them recover the huge capital investments necessary to build and maintain an extensive network of telecommunications infrastructure across the country.

With technological advances, however, the telecom industry has changed dramatically from its traditional landline role. The largest telecom companies in the country, AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) , have built impressive wireless networks to provide mobile access to customers, with coverage areas spanning the nation. Much of the growth in the telecom industry in recent years has come from the smartphone revolution, which has spurred escalating competition among wireless networks seeking to provide faster and more efficient service.

Yet despite the rapid evolution of the telecom industry toward mobile communications, millions of customers, especially in rural areas, continue to rely on regular landlines for their phone service yet also want broadband Internet and other related services. Because these rural networks had slower growth potential than their urban-area counterparts and were more costly to maintain, telecoms that were focusing on the high-end wireless market sought to divest themselves of their rural networks. At the same time, many of the smaller providers covering rural markets suffered from a lack of economies of scale, making the industry ripe for consolidation.

Along with fellow rural providers CenturyLink and Frontier Communications, Windstream moved aggressively into the rural telecom market niche. Through numerous acquisitions of independent regional telecom providers such as CT Communications, D&E Communications, and Iowa Telecom, Windstream added to its customer count and expanded its geographical reach. Most recently, at the end of 2011, Windstream completed its acquisition of PAETEC, giving the combined company coverage across 46 states and helping to boost its fiber route network.

Recently, though, Windstream has had to deal with a dilemma. On one hand, its rural telecom customers provide ample cash flow, which the company has used to finance its generous dividend. But with the gradual yet ongoing deterioration of the legacy landline industry overall, Windstream is trying to focus more on a strategy to serve commercial customers, which requires more upfront investment yet has better long-term growth potential. For investors, the issue Windstream has to resolve is whether it can replace the dying residential landline segment with the faster-growing commercial segment quickly and efficiently enough to keep its dividend intact.

Learn more
Stay tuned for further excerpts from my premium report on Windstream. In the next part of this series, I'll turn to some of the risks that Windstream is facing right now.

Meanwhile, learning more about the industry is a smart move. Frontier Communications in particular has many of the same issues and opportunities as Windstream, and in our premium research report on Frontier, we identify some of the most important things for you to watch in deciding which rural telecom is the best buy for investors. Don't wait to find out everything you should about Frontier and the industry; click here to claim your copy today.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 11, 2013, at 10:31 PM, neamakri wrote:

    Dividend is currently at 200% payout. Something must give.

  • Report this Comment On February 11, 2013, at 11:11 PM, 123spot wrote:

    They are making a bundle on me and my neighbors . They give us 1/2sssd internet service 1/2 the time and charge us full price for it. FCC? Spot

  • Report this Comment On February 14, 2013, at 11:59 AM, lexga wrote:

    LOL! It's down almost 7% today. Does that make it a better deal today than it was yesterday?

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