These 3 Trends Should Worry Windstream’s Investors

Windstream Holding's (NASDAQ: WIN  ) dividend is a hotly-contested topic by many analysts. Some believe that the dividend is destined for a cut, and the current yield of more than 12% isn't sustainable. Others believe that Windstream is turning a corner and may be able to support this yield after all. I recently wrote that there are a few reasons to believe that Windstream's dividend may be safe, but the company isn't without challenges. Looking at the company's recent earnings, there are three clear headwinds that smart investors need to keep a careful eye on.

It's none of your business
Analysts are constantly questioning how many business customers the company has won or lost, and unfortunately, the company's business customer loss rate is the first trend that should worry investors.

Windstream is attempting to focus on gaining enterprise customers and high-speed Internet customers to transform and grow the company. While business revenue increased slightly, and high-speed Internet revenue increased by 3% last quarter, there is no question the company has challenges with its customer base.

Industry peers like Frontier Communications (NASDAQ: FTR  ) reported a 4% decline in business revenue in the current quarter. Even stalwart AT&T (NYSE: T  ) reported a 3% decline. Compared to Windstream's slight revenue increase in this division, investors might be tempted to cheer that Windstream outperformed its competition.

However, it's Windstream's business customer metrics that are problematic. The company witnessed a 7% decline in total business customers, compared to a 5% decline last quarter. The company is adding enterprise customers at a 3% annual rate, but has been losing small-business customers at an 8%-9% rate. In short, Windstream increased revenue by charging more to fewer customers. This is not the way to turn a business around in the long-term.

Isn't this supposed to be a growth business?
While customers cancel their landlines, local telecoms have been heavily pushing high-speed Internet and video services as a way to offset these losses. The second trend that should worry Windstream investors is the company's challenges in high-speed Internet and video subscriptions.

While its peers are reporting solid growth in these two businesses, Windstream seems to be alone in its struggle to maintain, let alone grow, its subscriber base. Look at the difference between Windstream and its peers' growth rates in their most recent quarters.

Company

Annual High-Speed Internet Subscriber Growth

Annual Video Subscriber Growth

AT&T

6%

4%

Frontier

6%

11%

Windstream

(4%)

(6%)

Source: SEC Filings

Windstream is not only losing customers, but it is losing those customers while its peers are gaining ground. It's possible that, in Windstream's push to become more enterprise-focused, the company is losing sight of its residential customers' wants and needs.

Even more troubling is the fact that these losses appear to be accelerating. Last quarter, the company's high-speed Internet loss percentage was 3%, and video losses came in at 5%. Investors must be cautious about any increase in the speed of these losses.

A number the company knows it can't sustain
The third trend that should worry Windstream investors is the company's inability to sustain the current quarter dividend payout ratio. In the current quarter, the company's core free cash flow payout ratio (net income + depreciation – capital expenditures) came in just over 52%. According to Windstream's projections for this year, the payout ratio should come in between 67%-77%.

Considering that both AT&T and Frontier's payout ratio using core free cash flow came in at 61%, Windstream investors might seem justified in being happy. However, analysts are projecting a severe annual EPS decline of 20% at Windstream over the next few years, compared to Frontier's expected 4% annual EPS decline, or AT&T's expected 6% EPS increase.

Final thoughts
While Windstream tries to improve its business customer losses, the company must also find a way to stem the losses in its high-speed Internet and video businesses. The company made tremendous progress in 2013 by refinancing debt and cutting costs. However, if management can't find a way to grow its customer base, the dividend could still come under the knife.

The stock's 12% yield looks tempting, but keeping up with the company's challenges and successes is critical if you are willing to take the risk.

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