3 Reasons Windstream’s Dividend Is Anything but Safe

Windstream (NASDAQ: WIN  ) reports earnings soon, and with each new earnings report, the company has a chance to either seal its fate or surprise investors. The stock gets a lot of attention due to its yield of nearly 11%. However, the company has three issues in particular that investors need to pay attention to.

Time to get down to business
As a percentage of revenue, there is nothing more important to Windstream than its business division. The company hopes to become enterprise-focused, as 74% of revenue comes from business sales.

This is a big opportunity for Windstream, as well as other local telecoms like CenturyLink (NYSE: CTL  ) . Business sales for Windstream increased by 0.3% last quarter, but unfortunately, this was a deceleration of growth from the 1% increase in the prior quarter.

Where CenturyLink is concerned, business sales are moving in the opposite direction, as they were flat six months ago, but increased 1% last quarter. Seemingly on the other end of the spectrum is AT&T (NYSE: T  ) , which witnessed a 4.3% increase in consumer revenue, but overall wireline revenue was actually down 0.4%. We can extrapolate from these numbers that AT&T witnessed a decline in business sales.

This is the first issue Windstream investors should watch, as the company must maintain its momentum in business sales and reverse the trend seen in the last two quarters.

A small part of the puzzle, but getting worse by the day
While it's true that Windstream's consumer revenue is a much smaller part of the puzzle than for other telecoms, the company is struggling like none of its peers. Generally speaking, local and major telecoms are looking for growth in high-speed Internet and video to offset wireline losses.

When it comes to Internet and video growth, to say Windstream is in trouble is an understatement.

Company

High-Speed Internet Annual Growth

Video Annual Growth

Voice line Annual Growth

AT&T

(0.1%)

19%

(11%)

CenturyLink

2.4%

17%

(5.4%)

Windstream

(4%)

(6%)

(6%)

Source: SEC Filings

As you can see, Windstream reported worse results in high-speed Internet and video, and only AT&T did worse in voice line losses. To make things worse, CenturyLink is seeing improvements in its voice line losses, going from a 6% annual decline to a 5.4% annual decline over the last six months. Windstream, on the other hand, witnessed a 6% decline in both of the last two quarters.

A dramatic reversal?
One of the big surprises in Windstream's last quarterly report was an improvement in the company's core free cash flow. It's no secret that Windstream carries a large debt load relative to its peers. In fact, the company's debt-to-equity ratio of 10.3 is one of the highest in the industry.

To get an idea of how much more leveraged Windstream is, consider that AT&T's debt-to-equity ratio is just 0.8, while CenturyLink's ratio is just 1.2. This additional debt load has been hurting Windstream's cash flow, as interest costs have been cutting into net income.

In Windstream's last quarter, the company cut capital expenditures by 40% on a year-over-year basis. This significant improvement helped the company's core free cash flow reach almost $285 million, and the company's payout ratio was just 52%. This matched CenturyLink's 52% payout and is far better than AT&T's payout of over 90% in its current quarter.

However, if investors expect similar results in the future, they will likely be disappointed. According to Windstream's last earnings report, the company spent just $175 million on capital expenditures. However, the company's average capex spending in the last 12 months was 20% higher than last quarter. In addition, the company's projected capex for 2014 is expected to be between 14%-21% higher than last quarter.

Final thoughts
The bottom line is that Windstream's business revenue is slowing, and its consumer business is doing worse than its peers. When you combine these challenges with the likelihood of higher capital expenditures in the future, Windstream's 11% yield looks anything but safe.

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Read/Post Comments (4) | Recommend This Article (2)

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 May 07, 2014, at 4:22 PM, sosowong wrote:

    Windstream has paid 14 25cent dividends since you first wrote about the collapse of their high yeilding stock some 45 months ago. Would it be possible for you to provide a more detailed timeline of the death of this dividend? According to the history of your predictions their could be oppourtunity for another 3 years of dividends.

  • Report this Comment On May 08, 2014, at 9:32 AM, speculative1 wrote:

    This article along with many others is about the safety of WIN's dividend. They just declared yet another .25 quarterly dividend. As sosowong above mentions, the dividend has been paid religiously for 14 consistent quarters so how is your article supportive of the current declaration? I see you own CTL and that is proof your article is agenda driven. Maybe you wish you owned WIN at my cost which pays 12.5%. The stocks are owned for income which WIN does a stellar job providing than CTL. Next quarter you'll write the same article editing for the then current results. I don't buy your story today and in future transcripts.

  • Report this Comment On May 15, 2014, at 12:39 PM, oolioo wrote:

    I also have a return of over 12% in WIN (acquired 3/2011) and have read these kind of arguments ever since. To satisfy their claim of full disclosure Motley Fool should divulge their previous reports so their readers can judge for themselves how accurate their predictions are.

    However, I cant predict the future (and neither can any stock writer) so I will not predict whether WIN's dividend is safe or not.

    By the way, "anything but safe" could mean "super safe" or "not safe at all".

  • Report this Comment On May 22, 2014, at 10:57 AM, Eric1941 wrote:

    Hello All,

    I to own shares of Windstream. Like you, I have read reports of the naysayers for some time. I too am concerned about the sustainability of that beautiful dividend.

    If the author, Chad Henage, has a position in a competitor ISP, he could have a vested reasson to down play the sustainability issue. As speculative1 wrote, theopinion could be agenda driven.

    A reason to cut the dividend would be to accumulate more cash making the company healthier in that respect. That could help share value.

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