Will Windstream Stay Firm on Its Supersized Dividend?

On Thursday, Windstream (NASDAQ: WIN  ) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise.

Telecom stocks are well-known for their dividends, but Windstream's 12% yield stands out even among the top dividend payers in the industry. With peers having cut their payouts recently, many investors fear that Windstream could be next in line. Let's take an early look at what's been happening with Windstream over the past quarter and what we're likely to see in its report.

Stats on Windstream

Analyst EPS Estimate

$0.11

Change From Year-Ago EPS

(15.4%)

Revenue Estimate

$1.53 billion

Change From Year-Ago Revenue

(1.1%)

Earnings Beats in Past 4 Quarters

0

Source: Yahoo! Finance.

Will Windstream's earnings catch up with its dividends?
Analysts have gotten more pessimistic about Windstream's earnings prospects recently, having cut their first-quarter estimates by $0.02 per share and cutting nearly $0.10 from their EPS consensus for the full 2013 year. The stock has also been a bad performer lately, dropping more than 11% since the end of January.

Windstream is a giant in the rural-telecom industry, with substantial exposure to old-style legacy landlines and other aging telecom infrastructure. Given the limited options available to its customer base, the company has been able to generate substantial cash flow from providing those services to rural residents. Yet more recently, the company and its peers have seen landline customers move to wireless and other alternatives, putting Windstream's core business into decline.

Unlike rival Frontier Communications (NASDAQ: FTR  ) , which has cut its dividend twice since 2010, Windstream has been able to maintain its $0.25-per-share quarterly payout for years. One reason has been Windstream's superior ability to make a transition toward higher-margin business services, which are more profitable for the company. Windstream now boasts about 60% of its revenue from business services, up from 40% in 2010. In contrast, Frontier actually saw business-related revenue and customer counts decline during the first quarter, and average monthly revenue per business customer fell sequentially as well.

A recent problem Windstream suffered shows the vulnerability of the company's landline business. Late last month, an outage led to a loss of service for residential long-distance and business toll-free customers. Although the company rapidly fixed the problem, the lack of details on exactly what happened has to be troubling for Windstream and its investors.

In Windstream's quarterly report, pay close attention to whatever the company says about its dividend going forward. Whether it keeps its payout unchanged or makes a cut, the more important thing to understand is the reasoning behind the company's decision. In the long run, the dividend is secondary to Windstream's plans for further growth going forward.

Windstream investors need to learn from Frontier's example. Find out more about Frontier's series of disappointing dividend cuts in our premium research report on the stock. Learn more about all the key opportunities and threats facing the company by clicking here.

Click here to add Windstream to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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