Windstream’s Dividend Has Maybe A Year

This company needs to make some major changes or the main reason to buy the stock will go right out the window.

Feb 18, 2014 at 2:00PM

Over the last few years, many investors have learned the hard way that a huge dividend yield isn't always sustainable. In the telecommunications space, there have been several significant dividend cuts, and for well over a year Windstream Holdings' (NASDAQ:WIN) dividend has teetered on the brink of being cut. While the company consistently talks up the sustainability of the dividend, if certain trends continue this high-yield will have to fall.

A troubled business
It's no secret that the local telecom business has been difficult. Many smaller carriers have merged or been bought out in hopes that the larger survivors can prosper. However, a large part of each of these companies business is landline telephones that are going the way of the dinosaur.

If landline losses were limited just to Windstream then investors could choose to ignore the company and move on to a different stock. However, from Windstream's landline losses of 6%, to Frontier Communications (NASDAQ:FTR) decline of nearly 9%, or AT&T (NYSE:T) losing more than 11%, the whole industry is decaying.

The difference between say Frontier and AT&T compared to Windstream is, the former two companies seem to be growing the businesses they are supposed to, whereas Windstream is not. For instance, in high-speed Internet subscribers Frontier witnessed an increase of 5% on a year-over-year basis, while AT&T generated a 6% gain. By comparison, Windstream lost 3% of its Internet subscribers.

Video customers are another growth opportunity that both Frontier and AT&T capitalized on, while Windstream did not. Frontier added 15% more video customers, while AT&T added 3.5% to its U-Verse TV service. Windstream on the other hand, reported digital video customers declined 5% year-over-year.

In part because of Windstream's struggles with voice line losses, high-speed Internet losses, and video losses, the average analyst expects EPS to decline by about 20% annually over the next five years.

The numbers don't lie
While it's true that over 90% of Windstream's core free cash flow (net income + depreciation-capital expenditures) comes from depreciation, a 20% decline in net income is never a good thing. In addition, the company's depreciation is being depleted by about 2% per quarter over the last year or so.

While Windstream has cut its capital expenditures, even if the company maintains this lower level, the dividend could still suffer. Unfortunately, Windstream has been increasing its share count by about 1.5% annually and of course with more shares comes more dividends. If these trends continue, here is what Windstream investors can expect.


Net Income



Core Free Cash Flow



Payout Ratio

*Q1 2014

$31.3 mil.

$331.6 mil.

$194 mil.

$168.9 mil.

596.1 mil.

$149 mil.


*Q2 2014

$29.6 mil.

$325 mil.

$194 mil.

$160.6 mil.

598.2 mil.

$149.6 mil.


*Q3 2014

$28 mil.

$318.5 mil.

$194 mil.

$152.5 mil.

600.3 mil.

$150.1 mil.


*Q4 2014

$26.5 mil.

$312.1 mil.

$194 mil.

$144.6 mil.

602.4 mil.

$150.6 mil.


*Q1 2015

$25 mil.

$305.9 mil.

$194 mil.

$136.9 mil.

604.5 mil.

$151.1 mil.


(*projections = 20% annual decline in net income-2% linked quarter decline in depreciation - stable capex of roughly $194 mil. per quarter  - 1.4% annualized increase in shares)

The bottom line is, Windstream's core free cash flow payout ratio would rise more than 100% by the fourth quarter of 2014.

What can the company do?
If Windstream wants to successfully defend its dividend, there are several steps the company must take. First, a company with troubled cash flow can't issue new shares. Considering that Frontier's diluted share count stayed essentially flat, and AT&T actually retired 7% of its shares, its much easier to believe in these dividends than Windstream's payout.

Second, Windstream must find a way to keep its capital expenditures stable or decrease these expenses even further, this would help lower the company's payout ratio. Last, the company must find a way to at least retail its high-speed Internet and video customers. If CenturyLink, AT&T, Verizon, and Frontier can do this, then so can Windstream.

The bottom line is, Windstream is already in a very difficult position, and without a major turn in the company's fortunes, the dividend seems to have a year at these levels at best.

All tech investors should know about this massive opportunity
Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC-maker Dell in the late 1980's, before the consumer computing boom. Or purchasing stock in e-commerce pioneer in late 1990's, when they were nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play", and then watch as it grows in EXPLOSIVE lock-step with it's industry. Our expert team of equity analysts has identified 1 stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.

Chad Henage has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information