Windstream's Improving Business Makes It a Good Long-Term Bet

Windstream (WINMQ) provides voice and data network communications services in the U.S., competing against the likes of CenturyLink (LUMN -5.15%) and Frontier Communications (FTR). Windstream has put in a good performance this year, with gains of more than 10%. But, an eye-popping dividend yield of 11.30% is a big reason why investors are attracted to the company.

Windstream's dividend yield is the highest among its peers. Going forward, there are a number of reasons investors can expect Windstream to continue performing well.

More improvements ahead
This year, Windstream is focusing on improving its customer base. On the back of aggressive marketing strategies, the company is forecasting growth in its operational metrics in 2014. As a result, Windstream is expecting adjusted free cash flow between $775 million-$885 million, while it expects its dividend payout ratio to be 68%-78%. Further, Windstream is planning to improve its cost structure and the balance sheet to deliver more value to shareholders.

As a part of these initiatives, Windstream is looking to improve its sales capabilities and productivity through new sales and enablement tools and enhanced analytics to improve lead generation. In addition, the company is investing in enterprise growth initiatives such as data centers and fiber expansion.

Also, Windstream is taking significant steps to unify its enterprise systems, enabling its team to manage all aspects of customer life cycle from a single platform. This would bring more efficiency to its business, as the company will be able to manage different verticals such as sales, management, provision, billing, and customer support. This strategy will help Windstream simplify and streamline its processes and provide efficient customer service, which should lead to growth in the bottom line in the future. 

Besides this, Windstream is investing in broadband expansion to enhance its presence in the rural market. The company is also focusing on fiber-to-the-X networks, or FTTX, and broadband networks, while the deployment of data centers to support cloud-based services should also lead to better financial performance in the future. 

Windstream is enhancing its broadband coverage and surfing speed, and it is also ramping up FTTT construction. The company plans to add 75,000 new broadband lines this year, which should be another growth driver going forward. 

Focus on debt reduction and bottom-line growth
In addition, Windstream is working on ways to reduce its debt. The company has a huge debt of $8.9 billion. In comparison, its cash position is rather puny at just under $50 million, so reduction of debt is an important priority for Windstream. As a result, the fact that Windstream improved its balance sheet by refinancing approximately $4 billion in debt last year to extend debt maturities and lower cash interest expenses should encourage investors. 

But, the company's cash flow position is quite strong, which is why it has been paying a solid dividend and buying back shares. However, the negative aspect is that Windstream's earnings are expected to decline at a compounded annual growth rate, or CAGR, of 2% for the next five years. A decline in earnings will pinch the company's cash flow in the long run and might lead it to cut the dividend.

However, the company is taking steps to provide some impetus to its bottom line through debt reductions and cost cutting. So, the forecast for the next five years is better than how Windstream has performed in the last five, when its earnings declined at a rate of 18% per year. 

Analyzing the competition
Windstream needs to worry about the competition. Frontier Communications, for example, is making rapid strides in its business. Frontier's residential broadband market share was up in 84% of its markets last year. As a result, Frontier delivered a record 112,250 net broadband additions in 2013. Moreover, Frontier's customer retention initiatives are proving successful with a significant drop in customer churn rates last year. The company delivered a 61% year-over-year improvement in residential customer retention. 

CenturyLink, on the other hand, is recording rapid growth in high-speed Internet and Prism TV customers. Last year, CenturyLink added 14,000 HSI customers and 69,000 Prism TV subscribers. More importantly, CenturyLink's fiber-connected towers are gaining good momentum, as the company saw a huge 30% bump in its deployment in 2013. 

Bottom line
Both Frontier and CenturyLink are making good progress, and Windstream needs to keep up its momentum to counter their threat in the long run. Looking at the moves that Windstream is making, there is a good probability that the company's performance will continue improving going forward. So, investors should definitely take a closer look at Windstream.